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


Web Log - January, 2008


Another turbulent day by "investors who think that history always begins this morning."

The Fed's super-aggressive rate cutting strategy failed to satisfy investors on Wednesday.

Intraday Dow Industrials chart and final results for Wednesday, January 30, 2008
Intraday Dow Industrials chart and final results for Wednesday, January 30, 2008

The Dow Industrials had been down around 50 points all day until 2:15 pm, when the Fed announced a new ½% interest rate cut, on top of last week's emergency ¾% interest rate cut. Taken together, this was one of the most aggressive interest rate cuts in the Fed's history.

Fed chairman Ben Bernanke has a long record of believing that the 1930s Great Depression could have been avoided if the Fed had been more aggressive in cutting interest rates, and now we're seeing "Bernanke's historic experiment" in action.

Investors immediately switched from a depressive state to a manic state, pushing the Dow Industrials up almost 250 points.

(I wish to thank the web site reader who informed me that some political pundits are using the phrase, "These are people who think that history always begins this morning." I adapted that phrase in the title of this posting, even though investors could more accurately be described as people "who think that history always begins five minutes ago.")

Alas, shortly after 2 pm, history began again, as Fitch Ratings announced that it would downgrade the rating of the world's fourth largest bond insurer Financial Guaranty Insurance Co. (FGIC). Of the three largest bond insurers, MBIA Inc. and Ambac Financial Group Inc. are also being threatened with a downgrade, while ACA Capital Holdings has already been downgraded. I described this last week in "The collapse of the bond insurers, ACA, Ambac and MBIA." (Also, see "A primer on financial engineering and structured finance," to learn how bond insurers magically transform low-rated securities into AAA rated securities.)

This came on top of bad news hours earlier: The fourth quarter GDP figures indicated that the US economy had slowed more dramatically than expected, indicating a severe contraction and a likely recession.

This came on top of more bad news from Europe: Swiss bank UBS AG, Europe's largest bank, announced that it have to write down $4 billion more in securities tied to the US mortgage meldown. Recall that UBS already wrote down $10 billion in securities a month ago.

Shortly after 2 pm, the Dow Industrials started falling like a stone, giving back the 250 points it had gained after the Fed rate cut.

I know that regular web site readers are really sick and tired of seeing the following chart over and over, but look again at the following graph of P/E ratios back to 1871 that I first posted in "How to compute the 'real value' of the stock market" last August:

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

As this graph shows, the historical P/E ratio averages around 14, and has gotten as low as 5-6 several times in the last century, most recently in 1982. It experienced an enormous spike, starting in 1995, and is now clearly poised to fall again to the 5-6 range. This would push market prices well below the Dow 4000 range.

If you believe that "history always begins this morning," then the above chart is completely useless to you. But if you want to know what's really going on in the world, then you have do what Generational Dynamics does -- look at the world as a large, complex system where things that are happening today have causes that are decades or sometimes centuries old, propagated forward through the flow of generations.

From the point of view of Generational Dynamics, we're overdue for a new generational stock market panic and crash, followed by a 1930s style Great Depression. This is absolutely certain, though the exact date can't be predicted -- tomorrow, next week or next year. But it's been clear since the August "credit crunch," and particularly in the last few weeks, that the international financial structure is crumbling faster and faster, as one huge bubble after another continues to deflate. (31-Jan-08) Permanent Link
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FBI joins SEC into wide-ranging investigation into mortgage-lending industry

The widespread fraud against investors and the public is getting more scrutiny.

As we've been discussing a great deal recently, it's increasingly important that crimes like fraud have been THE RULE in the real estate industry in the last few years of the real estate bubble, rather than the exception.

We might break down the actors into these groups:

The following notes apply to the above list:

Up until now, any investigations by the FBI or SEC have focused on the lower levels, mainly retail service provides.

Now the FBI has indicated that it opened criminal investigations into fourteen companies, including some of the world's largest banks.

The possible charges include accounting fraud, improperly securing loans and insider trading during the sub-prime mortgage scandal.

The FBI did not name the companies, but Bear Stearns, Goldman Sachs and Morgan Stanley have all announced that they are targets of the inquiries.

The FBI has been warning for years that mortgage fraud is a significant and growing problem. In the 2006 fiscal year, it documented 35,600 suspicious-activity reports related to mortgage fraud, up from 22,000 the year before and as few as 7,000 in 2003.

As the financial crisis deepens, we can expect these first few criminal investigations to turn into a torrent. (30-Jan-08) Permanent Link
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Reader comments on the Nihilism of Generation-X

Who's more at fault for our problems - Gen-Xers or Boomers?

My recent article, "The nihilism and self-destructiveness of Generation X," brought several comments from web site readers. I'm going to answer the most interesting comments here.

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"As an Xer, I actually enjoyed reading your perspective on this.

I found your computer industry experiences enlightening. Thanks for sharing that. I read The Soul of a New Machine 25 years ago and enjoyed it immensely, as it described the kind of workplace where real work got accomplished and rewarded by real managers. As you point out, such an environment no longer exists anywhere due to the generational configuration that is present. And a good question to ask would be: What generation was not present in the workforce at that time? The Xers, of course, so that does validate your point to some extent.

I dropped out of the workforce 5 years ago, as it appeared that things were getting and would continue to get worse, much worse, as the Xers were beginning to move into management slots and the rest of the Silents got pushed out by the Boomers. That turned out to be the case in my former workplace and I got a lot of phone calls for 2 or 3 years after I left. Leaving was for the best.

As far as Xer managers go, it's also been my experience that they are particularly insidious as managers, even worse than the worst of the Boomers. The Boomers will promote the most incompetent and despicable Xers they can find, as they are only comfortable supervising individuals who are even more incompetent and despicable than they are, and there are plenty of Xers to pick from who fit that description. This then feeds the fury and/or fears of the remaining competent employees, particularly the Xers. The best Xer employees don't want or even bother to aim for promotions anymore. ...

Anyway, your article helped me see the dynamic that is really present. The Xers are just as much to blame, maybe more. But the sad fact is that the Xers who have power are a more despicable subset of Xers as a whole.

This description of Boomer managers is consistent with the stereotype -- true for the most part -- that Boomers are incompetent boobs who are easily led.

Through the 60s-90s, the Boomers were never able to do anything other than to complain and criticize, and allowed the Silents to lead and take care of everything. Since the Silents pretty much retired in the 1990s, Boomers were still unable to do anything other than complain and criticize, but they still were promoted into senior management positions. Without Silents to make the major strategic decisions, became dependent on the opinions of others, and Gen-Xers filled that gap.

You say that, "The Boomers will promote the most incompetent and despicable Xers they can find, as they are only comfortable supervising individuals who are even more incompetent and despicable than they are, and there are plenty of Xers to pick from who fit that description."

What you're describing is a generational variant of Gresham's Law, which says that "Bad money drives out good money." In this case, "Bad Gen-Xers drive out good Gen-Xers." The bad Gen-Xers, who are the most dishonest, nihilistic and destructive, are the ones best able to convince the malleable Boomers to promote them.

That's why it seems that to a lot of people that Gen-Xers are ALL bad. Of course that's not true, but what happens is that the bad Xers seem to rise to the top in this era of Lenscap Stupidity by the Boomer senior management. For example, not all Gen-Xers are like nihilistic, destructive, self-destructive groups at, but that group still has inordinate visibility because of the weakness of the Boomers leading the Democrats.

"A few years ago, I worked with a guy who was a Silent/Boomer, born in 1943. He was sort of a mix of both. We became friends. The only reason we were friends was that we both hated the Boomer managers we worked for, especially one born in 1947.

Anyway, he had come up with several terms to describe what the Boomers do. The first was "false lighting," which he sort of described as creating a derogatory and incorrect impression of an individual and trying to highlight that as much as possible. The second was "questioning motives," which meant that the Boomer managers tended to focus on behavioral stuff that they could arbitrarily distort and mischaracterize, rather than work performance."

Those two phrases capture what Boomers do: criticize and complain.

However, I'd have to add that that I've found that Boomers DO appreciate work performance, even though they don't demand it, and often don't understand it.

The Xer managers are more likely to ignore, denigrate and sabotage work performance.

"Among those Boomers who want the system to collapse there are those who already got their goodies, yet think the system is somehow immoral, and wish it would end.

And among Xers who yearn for collapse, there are those who are frustrated that they didn't get theirs, and see a collapse as a leveling of the playing field.

There are, of course, the two additional cases, Boomers who don't get much out of the system, and Xers who have done well already, and who therefore share the views of the other generation in the previous case."

I don't see this as the most important distinction.

One could argue, for example, that I would "want the system to collapse" because I haven't gotten my "goodies." I would strongly disagree with that characterization, but even if it were true, I would never do anything to bring about the collapse. Boomers are complainers and talkers, but not doers. Boomers are not destructive, except through inaction.

Xers who yearn for collapse are doers, not talkers, and would actively take forceful steps to bring about that collapse and destruction. In fact, that's how the meaning of "nihilism" came to mean collapse and destruction of everything, as the "Gen-Xers" of the day in the Bolshevik Revolution destroyed every Tsarist instution, leading to the bloody deaths of tens of millions. Today, They've already destroyed the world financial system. That's the difference between Xer Nihilism and Boomer stupidity, and it's the point that I was addressing in the original article.

"There was never a declaration of war on Iraq passed by Congress. In addition, we have already met the objectives set out by Pres. Bush in this conflict. Saddam Hussein is dead, buried and his gov't is no more. What we are in now is an occupation which is draining our treasury by the day. ... Somehow, no one in our administration ever read Sun-Tzu.

That's all in the hand that was dealt to us. Remember that we're not just a country - we're policemen of the world. Like it or not, that's our duty and our destiny, and we have no choice but to fulfill it.

I can assure you that everyone in the administration is familiar with Sun Tzu. In fact, when Chinese president Hu Jintao visited President Bush in Washington almost two years ago, he brought a gift with him: A silk copy of the Art of War.

"You posted an article about how an Xer woman had apparently brought false domestic violence charges against her Boomer husband and in response he had killed her by smashing her head and then he committed suicide. My guess is that in many cases Boomer feminist lawyers suggest such things to "get even" with Boomer men. The same kind of dynamics play out in the workplace when incompetent Boomer women who have been promoted under affirmative action programs make decisions to promote Xer women who then carry out similar false, sadistic and hateful actions in the workplace. That's what most of the phone calls I received for 2 or 3 years after I left were about now that I think more about it."

I spent over ten years doing research on gender issues, and I've heard stories of that type over and over. At the time I did that research, I didn't realize that it was a Gen-Xer vs Boomer issue, but now that's a lot clearer.

There are many excellent women managers and senior managers -- I've worked for many of them in my career.

But as in other areas, Gresham's Law applies, and the bad Gen-Xers drive out the good Gen-Xers, and many woman have been promoted to positions where they're totally incompetent in order to meet a gender quota. The absolute worst is college "women's studies programs," where the only qualification to be a professor is, as far as I can tell, the knowledge of a 5th grader combined with an estrogen-based hatred of men.

Working for a competent woman manager can be a joy; working for incompetent woman manager can be a hell worse than death. And if you don't believe that, just ask any woman working for one.

"I find your overall thought-process compelling and even applicable to my life. I wanted to respond to your article about the Nihilism of Generation X (of which I am firmly a member, being born in the mid 1970's) stating that was an unfair depiction of my generation as a whole. But then the French trading catastrophe came to light, and upon re-reading your article, I have to concede you are on to something. Just please don't paint every member of a generational group with the same brush--there are leaders that will emerge from each generation to clean up the mess. I thank you for mentioning Eisenhower as an example, and when the time comes (i.e. after the huge mess is made), I hope Generation X can step up to the plate and produce a leader as solid as he.

I have no doubt that you will produce such a leader, though if you don't, then the country won't survive. Your generation may produce some villains, but it will also produce what will go down in history as the greatest leaders of the time.

"This subprime crisis in general has the capacity to bring this country and the worldwide economy to its knees as you have explained much on your website. However, in order for it to do so, it needs to cause a true panic that has thus far been avoided (albeit narrowly). I suspect the "drunken euphoria" you alluded to previously and the overall ignorance of very real risks in the markets are due in large part to lenscap stupidity. To put it bluntly, Boomers would just as soon stick their heads in the sand about risks to their retirement money, which would not survive a prolonged downturn at this point, and this will prevent a real panic from taking hold as long as Boomers are still in their high-paying jobs and continue to put money away into 401(k) and the likes. If anything, their propensity to stick their heads in the sand (because in their minds, the return to austerism they had to endure in their childhood years is too painful to face) will keep them plowing money into the markets regardless of risk levels."

That's absolutely not true. Everything will change overnight with the "regeneracy."

From the point of view of Generational Dynamics, we're already seeing the first signs of the "regeneracy." This word is used in generational theory to refer to a time when the country suffers an enormous shock, the political bickering stops, and the country unifies around its leader. It's called the "regeneracy" because it's the time in the generational cycle when national and societal unity is regenerated, and the country is unified once more.

There are, unfortunately, many enormous shocks yet to come -- a major stock market crash, and some kind of military disaster, perhaps a terrorist event on American soil or a military disaster overseas. These catalysts will completely move the country toward a unified goal of survival, and preservation of the American way of life, and we will be led into the Clash of Civilizations world war.

"While you're right in an academic sense that the subprime crisis should cause a crisis, I am not totally sold on the fact this will be the pivotal event to cause the generational crisis you refer to. While the risks are still there, the crisis may indeed unfold quickly. But if it does not, the stage will be set for a stock market bubble to rival that of the late 1990's to last 2, 3, maybe 4 years. It could be that bubble bursting sometime between 2012 and 2016, as outlined in Robert Kiyosaki's book "Rich Dad Prophecy", that causes the real unraveling to take place. Right now, our Boomer-led government can borrow more money to bail everyone out to keep people's heads in the sand (i.e. get re-elected). But when the tide of money flows into Social Security changes next decade, our government won't have the ability to do this so will have to let the unravelling take place no matter how painful it is."

There isn't a snowflake's chance in hell of anything like this happening.

It's not the subprime crisis that's causing the financial crisis; that's just a symptom.

The underlying cause is the totally debauched, depraved and abusive use of credit, as implemented by Gen-Xer "financial engineers" who, with full knowledge of what they were doing, defrauded investors and the public, creating enormous credit, real estate and stock market bubbles that are now leaking like mad.

This fraud was made possible by the "Lenscap Stupidity" of Boomer senior managers, who went along with the fraud so that they could benefit as well.

What you don't understand is that it's the constellation of generations that's driving this. You have vicious Gen-Xers with no adult supervision from their Boomer managers. This combination is lethal.

Even if there were no bubble today, the bubble would now be created by this generational constellation.

So it's not the subprime crisis that's causing disaster; and even the bubbles themselves are not the root cause. The root cause is the lethal combination of nihilistic, destructive Gen-Xers and stupid, greedy Boomers.

"I think your ideas have a lot of merit to them, but if subprime turns out to not be the straw to break the camel's back, I hope your repeated warnings that it would be will not discredit your ideas overall."

Think of the coming disaster as a 20-mile high tsunami heading for us, launched decades ago, about to wash over the entire country. There is nothing that can stop it. All you can do is prepare for it. Don't worry about me; worry about yourself.

"According to Strauss and Howe, we should see a boomer in the white house this year. Clinton, Edwards, Romney, Huckabee,Thompson and Guliani fit the bill. However, we could see a Silent or X-er in the WH in the form of McCain or Obama. Who do you see taking the oath of office on 1/20/09?"

I don't think it really matters, since events will be driving policies, rather than vice versa. If I had to choose who I was most comfortable with, given that I know what's coming, I would think the best choices are McCain or Clinton. Either one would hopefully provide some adult supervision to keep the Xers from making too many impulsive decisions. On the other hand, maybe an Obama would be more decisive. How's that for a wishy-washy response?

"Thank you for your response to my inquiry. I believe and feel in my gut that we are facing major changes in the near future. If the US Govt does keep its promises, they will be paid in virtually worthless or near worthless dollars. I do not count on these promises for my own future, because I am skeptical and have been for a long long time, but I feel bad for people who do. I love my country but the government is wasteful, full of liars and ignorant on many levels. I just don't understand how some of these govt officials live with themselves and how they keep getting away with such stupidness. I'm probably showing my GenX attitude too much, so I'll just say Thanks again for your work and I look forward to reading your website posts daily."

And what's more, it's not just our government, but governments around the world, in all the countries that fought in WW II as a crisis war.

The survivors of WW II did some great things -- they created the United Nations, World Bank, Green Revolution, World Health Organization, International Monetary Fund, and so forth. They created these organizations and managed them for decades with one purpose in mind: That their children and grandchildren would never have to go through anything so horrible as World War II.

Now all those people are gone, and the people left behind have no idea what's going on or what to do. The result will be massive, brutal, and bloody. I estimate that some 1-3 billion people will be killed. After it's all over, then there will be a new generation of survivors who'll do some great things, and the cycle will start all over again.

Unfortunately, it turns out that that's what life is all about.

"While you, rightly so ( and I am a proud X-er), speak of our negative tendencies, X-er's do have some good qualities to them. As you well know, we are survivors and pragmatists to the core which will come in handy as this crisis get worse."

The survival of the country and its way of life depends on you and your generation. You'll be responsible for every victory and every disaster. I hope you succeed in everything you do. (29-Jan-08) Permanent Link
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Fidelity Investments salesman admits that money market funds are not safe

A web site reader called Fidelity and asked.

The question was: "If Fidelity goes bankrupt, then will my money be protected?"

Here's the answer that the web site reader relayed to me:

As far as I can tell, the only safe places to put your money today are as follows:

For the unsophisticated investor, there are no securities today that appear to be safe.

If any other web site readers have information of this type, please let me know and I'll post it. (28-Jan-08) Permanent Link
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European hedge funds are suspending redemptions.

This is very ominous.

According to a a news report, ten European hedge funds have suspended redemptions, to keep from collapsing. In other words, investors are no longer permitted to take their money out. The emergency was apparently triggered by last week's stock market volatility, which was the worst in Europe.

In the worst case scenario, the hedge funds will be worthless, and investors will lose their entire investments, as happened last July when Bear Stearns announced that its hedge funds were almost worthless.

Here's the story:

"A raft of European hedge funds have been forced to introduce emergency measures to protect their businesses from collapsing in the wake of the turmoil in financial markets.

Up to 10 European hedge funds have suspended redemptions after investors clamoured for their cash when the managers made severe losses.

A London prime broker told The Sunday Times that even before last week’s extreme gyrations, nearly two-thirds of London-based hedge funds had lost between 4% and 10% of their value. A “significant number” had lost much more, he said.

The manager of one of Britain’s biggest hedge funds said: “It’s been an extraordinary week. Even in the crash of 1987 I don’t remember so much carnage.”

Experts warned that the problems among hedge funds were likely to cause more disruption in the markets, especially if many are forced to liquidate positions.

This is exactly the kind of situation that I've been warning about, since it could lead to a full-scale stock market panic and crash.

Unless the stock market bubble starts growing again (which I consider to be very unlikely, though I've been surprised before), there will be additional hedge fund failures.

However, at the time that I'm writing this (about 12:45 am ET), Asian markets are down sharply, with the Nikkei index down 3.1%. Wall Street index futures are down about 0.75%. It's possible that the overall collapse is accelerating. Beware. (28-Jan-08) Permanent Link
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Fourth quarter corporate earnings continue to fall as the global credit markets unravel

Stock market volatility was sky high on Wall Street last week, as a 5% intraday surge on Wednesday wiped out the market losses at other times in the week.

The "fundamentals" continued to go from bad to worse.

Fourth quarter corporate earnings estimates have continued to plummet, though at least they seem finally to be leveling off. Here's the summary from Friday from CNBC Earnings Central:

" As of Friday, January 25th:

160 companies in the S&P 500 have reported earnings for Q4, 59% have beaten estimates, 14% were in-line, and 28% have missed.

The blended earnings growth rate for the S&P 500 in fourth-quarter 2007, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -20.5%.

At the start of the quarter, the growth rate for Q4 was 11.5%. (Data provided by Thomson Financial)"

We can now update the table of the changes in fourth-quarter earnings estimates since the beginning of the fourth quarter, as follows:

  Date    4Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct  1:             +11.5%
  Dec  7:              -1.3%
  Dec 14:              -3.8%
  Dec 31:              -6.1%
  Jan  4:              -9.5%
  Jan 11:             -11.3%
  Jan 18:             -19.0%
  Jan 25:             -20.5%

So, at the beginning of 4Q (on October 1), the estimate was that earnings would grow by 11.5%. Today, the estimate is that they'll fall by 20%. After 12 years of bubble earnings, the Law of Mean Reversion is beginning to take hold, and we should expect to see low earnings for years to come.

The news in the credit markets is getting uglier and uglier.

Each Week, Prudent Bear's Doug Nolan posts a Credit Bubble Bulletin, using news stories to provide a lengthy summary of the week's news in the global financial markets. Here are portions of a few of the news stories that he quoted this week (unfortunately, Nolan doesn't give links):

Investors are in a trigger-happy emotional state, and the market has been on a general downward trend since December. If the market continues to fall, it will cause insolvency in a large hedge fund or financial institution, triggering a domino effect that will cause a generational panic and crash.

From the point of view of Generation Dynamics, the market is overdue for a generational panic and crash, although the exact time cannot be prediction. With the stock market overpriced by almost 250% (same as in 1929), we're headed with absolutely certainly for a generational stock market panic and crash, leading to a new 1930s style Great Depression. (28-Jan-08) Permanent Link
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Noose tightens on banks and rating agencies, as mortgage evaluator provides evidence of fraud

Clayton Holdings, a company that analyzed thousands of mortgage loans for investment banks, said in a statement on Saturday, that it had "entered into a cooperation agreement" with the office of Attorney General Andrew Cuomo and would tell what it knows about how Wall Street sold mortgage investments despite warnings from Clayton that the underlying home loans did not meet quality standards.

There is widespread belief (by me and many other people) that "financial engineers" and others in investments banks did not defraud the public "by accident," but knew that they were performing fraudulent acts -- maybe not in 2002 or 2003, but certainly by 2005-2007. These fraudulent acts were designed and perpetrated by Generation-Xers, under the noses of senior management Boomers who chose to close their eyes to the fraud for their own gain.

What we've been hearing for over a year was that "Duh, we're victims too. We didn't know that there was anything wrong with CDOs of CDOs of CDOs."

The evidence is mounting that, as early as 2005, investment banks took pro-active steps to deceive the public and to hide their fraudulent activities from the public.

One of the keys to exposing that fraud will be organizations that were supposed to be "watching over" and auditing these kinds of financial transactions in one way or another. We've discussed several kinds of these agencies on this web site in the past:

Now we're looking at a third kind of "watchdog" firm. Clayton Holdings is a due-diligence firm that reviewed thousands of mortgage loans for compliance to lending standards. According to company president Keith Johnson, their reports of non-compliance were ignored by investment banks. "In some cases we felt that we were potted plants."

The new agreement with the Attorney General grants criminal immunity to Clayton, though there is no evidence so far that Clayton did anything wrong.

But an an analysis by the NY Times indicates that the noose is tightening around the necks of both banks and ratings agencies:

"As part of the deal, Clayton has told the prosecutors that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending exceptions. In an another sign that the industry was becoming less careful, some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio, a person familiar with the investigation said.

The mortgage business boomed from 2002 to 2006, generating lucrative fees for mortgage brokers, lenders, credit rating firms, investment banks and many investors. Investment banks began buying billions of dollars of more risky loans made to borrowers with blemished, or subprime, credit histories and packaging them into securities [CDOs] that paid high interest. ...

It is unclear how many lending exceptions are contained in the $1 trillion subprime mortgage market, but industry participants cite figures ranging from about 50 percent to 80 percent for some loan portfolios they examined."

These figures are absolutely staggering. They indicate that non-compliance in mortgage loans was THE RULE rather than the exception in 2005-2007. Furthermore, Clayton's claims indicate that investment banks were taking pro-active steps to IGNORE non-compliance.

That's why these mortgage-based securities are almost worthless. If only 5-10% of the underlying mortgage loans had been non-complying, then there would probably be no problem. But when 50-80% of the loans are non-complying, then it's almost impossible that CDOs backed by these mortgages will have any value. (To understand this better, take a look at the section "How the 'cascade rule' works" in my article on article on financial engineering.)

Furthermore, did you follow this point about "halving the sample of loans?" This is incredible. Each non-complying loan that Clayton found had to be reclassified as risky. Therefore, Clayton was instructed to evaluate only half as many loans in each portfolio, so that only half as many loans would have to be reclassified as risky:

"Investment banks hired companies like Clayton to evaluate a sample, say 20 percent, of the loans. The review was supposed to determine whether the loans complied with the law and met the lending standards that the mortgage companies said they were using. Loans that did not were classified as exceptions.

As demand for the loans surged, mortgage companies were in a strong enough position to stipulate that investment banks have Clayton and other consultants look at fewer loans. The lenders wanted the due diligence to find fewer exceptions, which were sold at a discount, the person familiar with the investigation said."

All of this makes it 100% clear that the investment banks were defrauding the public and investors, and that they KNEW that they were defrauding the public and investors. The "Duh, I didn't know" excuse is eliminated.

Now let's turn to the ratings agencies.

According to the article, "Investment rating firms like Moody’s and Fitch have said that they were deprived of [information on non-compliance] before they gave the securities the top rating, triple-A."

But the article continues:

"The investment banks then pooled the mortgages into securities, often by blending loans from different lenders. Information on those mixed pools was then delivered to the rating agencies, which assigned the securities a score. Pension funds and other big investors bought them because they had triple-A ratings.

But investment banks did not give the rating agencies their due diligence reports, and it appears that the agencies did not demand them, people familiar with Mr. Cuomo’s investigation said.

In January 2007, Clayton briefed at least one credit rating agency about the exception reports it was producing, the person involved in the agreement said, but the credit firm did not ask to see the reports. ...

Chris Atkins, a spokesman for Standard & Poor’s, said the firm was not responsible for verifying information provided to it by the issuers of securities. It is customary for rating agencies to accept the information they are provided by issuers of securities.

In November, Fitch Ratings published a detailed review of 45 loans in an effort to identify what went wrong as mortgages were turned into securities. It found extensive inaccuracies and fraud. The firm noted that many of the problems would have been easy to identify by looking at loan applications, appraisals and credit reports — but it appears that such review was either never done or ignored. Fitch now says that it will no longer rate subprime mortgage securities unless it is provided access to loan files."

In my recent article on Boomers and Gen-Xers, I used the phrase "Lenscap Stupidity," alluding to a Boomer government official who was briefed for half an hour while looking through binoculars with the lenscap still on. The third paragraph above is a perfect example: The ratings agencies knew that the news was bad, and they refused to hear it.

It's very convenient for S&P to say that they simply accept the information provided by the rating agencies without questioning it, and it was only in November that they learned of "extensive inaccuracies and fraud," but if the prosecutor determines that they "must have known" or "should have known" anyway, and the jury agrees, then fraud will be found.

One thing is clear: That there has been an enormous amount of crime committed, by people at many level -- ordinary people applying for mortgages, credit rating firms, housing contractors, housing inspectors, real estate appraisers, real estate brokers, mortgage brokers, mortgage lenders, savings banks, investment banks, ratings agencies, bond insurers, and we're looking at due diligence firms. (This paragraph updated on 30-Jan.)

When combined with the Société Générale fraud, you can see that there's a lot of fraud going on, and a lot of prosecution going on.

This is not unexpected, because it's all happened before. In fact, the next-to-last international generational financial crisis, the Hamburg crisis of 1857 (panic of 1857), was triggered by a small event -- an employee of the New York branch of the Ohio Life Insurance and Trust Company was found to have embezzled money.

There was a great deal of embezzlement leading up to the last generational financial crisis. I've quoted this passage before, but it's worth posting again. John Kenneth Galbraith described what happened -- and what will happen again -- in his 1954 book, The Great Crash - 1929, as follows:

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in -- or more precisely not in -- the country's businesses and banks. This inventory -- it should perhaps be called the bezzle -- amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

The stock market boom and the ensuing crash caused a traumatic exaggeration of these normal relationships. To the normal needs for money, for home, family and dissipation, was added, during the boom, the new and overwhelming requirement for funds to play the market or to meet margin calls. Money was exceptionally plentiful. People were also exceptionally trusting. A bank president who was himself trusting Kreuger, Hopson, and Insull was obviously unlikely to suspect his lifelong friend the cashier. In the late twenties the bezzle grew apace.

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

After the first week or so of the crash, reports of defaulting employees were a daily occurrence. They were far more common than the suicides. On some days comparatively brief accounts occupied a column or more in the Times. The amounts were large and small, and they were reported from far and wide. ...

Each week during the autumn more such unfortunates were reveled in their misery. Most of them were small men who had taken a flier in the market and then become more deeply involved. Later they had more impressive companions. It was the crash, and the subsequent ruthless contraction of values which, in the end, exposed the speculation by Kreuger, Hopson, and Insull with the moey of other people. Should the American economy ever achieve permanent full employment and prosperity, firms should look well to their auditors. One of the uses of depression is the exposure of what auditors fail to find. Bagehot once observed: "Every great crisis reveals the excessive speculations of many houses which no one before suspected." [pp. 132-35]

Galbraith's point was that there were many criminal activities going on before the 1929 crash, but nobody cared, as long as everyone was making money. But once the crash occurred, any irregularity was viewed with suspicion and led to an investigation. These investigations turned up many cases of embezzlement -- people who had "temporarily borrowed" money that wasn't theirs to invest in the stock market, and then got caught in the crash.

That's happening again. If you're one of the people who have committed embezzlement or fraud, then it's time to put your affairs in order, because you're going to get caught. (28-Jan-08) Permanent Link
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Historic Société Générale fraud shocks world financial system

Did a "rogue trader" snooker Ben Bernanke and the Fed?

The details are still coming out, but the bare facts are these:

Was the Fed snookered?

The reasoning behind the claim that SocGen snookered the Fed is as follows:

Frankly, I believe that this reasoning is completely backwards. If SocGen had revealed the $7.2 billion fraud on Monday, it might well have triggered an even larger selloff on Tuesday by panicky investors. At any rate, Chaos Theory tells us that it's impossible to predict the effects of one particular financial event on another particular financial event.

However, there are broader questions being asked about the SocGen fraud, and whether SocGen is covering something up.

The hard-core conspiracy theorists are suggesting that SocGen's senior management knew what Kerviel was doing all the time, and that they wanted him to do it to cover up the $3.5 billion writedown of mortgage-based securities. Before Kerviel was taken into police custody on Saturday, there were some pundits suggesting that Kerviel would never be found because he didn't exist, and was just a made-up name proffered by SocGen execs.

If we go beyond the tinfoil hat conspiracy theories, there is the following real question: How is it possible that Kerviel was acting alone, as SocGen claims, and yet was able to place fraudulent trades for many months, without being caught either by SocGen's computer systems or by its human auditors?

Even if Kerviel spent four years working in the back office, the reasoning goes, SocGen's auditing systems are far too robust and complex for one person to fool for very long.

Once again, I find this reasoning to be backwards.

In fact, it's quite possible that a single person, like Kerviel, might have understood the "soul" of SocGen's systems, but extremely unlikely that two people could have, and then agree to cooperate on this major fraud. I don't see how it's likely that more than one person, acting alone, could have pulled this off.

When I refer to the "soul" of computer systems, I'm not getting mystical. Over the years, I've reviewed hundreds of software programs, and as a consultant worked on dozens of large computer systems, and unless a computer system is dysfunctional, then it has a "soul," an internal flow, an internal consistency, an internal philosophy that ties it all together.

(This concept of a "soul" in computer systems is not unique with me. A web site reader recently reminded me of Tracy Kidder's 1981 Pulitzer prize winning book, The Soul of a New Machine, on the development of a new computer at Data General.)

It's unusual for even the programmers working on the system to understand its "soul." When I've worked on these large systems as a consultant for a few months, I've found that it's not unusual to have to explain to them how their own software works. Typically, what happens is that the original system architects, designers and programmers understand its "soul," but when they leave and are replaced by new programmers, the new ones may understand how the components work individually, but they generally never grasp the "soul" of the system as a whole. And as for management -- they really never understand a software system, except in gross functional terms.

Now, I'm sorry if the last couple of paragraphs seemed a little too mystical, since there's nothing mystical about it. It's simply that computer systems become so large and so complex, that they're too large to be fully grasped. It's like a person living in a beautiful mansion who understands what each room is for, but only the architect understands entire home as an entire system or unit.

So the point is that, based on the facts that have been released so far, here's what I consider to be the most likely scenario: Jérôme Kerviel joined the SocGen's back office in 2000, and spent four years learning SocGen's computer systems and procedures -- and he had the skill to understand the "soul" of these systems better than anyone else there. He understood the systems so well, that he understood its rhythms, its strengths and its weaknesses. When the time came, he was able to exploit his knowledge.

That's why I say that I would be surprised if it turns out that he had an accomplice. There really couldn't have been someone else as knowledgeable as Kerviel working with Kerviel, or the accomplice would already be known to the authorities.

So, in my opinion, the critics of SocGen who suspect an accomplice are likely to be wrong.

But the critics who suspect that other banks may be susceptible to the same problems. There are other programmers in other banks who understand the "soul" of those computer systems too. And if they decide to become "rogue traders" also, then we may hear a lot more about these kinds of fraud.

From the point of view of Generational Dynamics, none of this is surprising. In my recent article, "The nihilism and self-destructiveness of Generation X," I showed how the destructiveness of today's Generation-X, combined with the "Lenscap Stupidity" of the Boomer generation, makes this kind of fraud almost the norm, more than at any time since the 1920s.

In fact, in August there was a similar incident at Crédit Agricole, one of Société Générale's competitors, but costing a mere €230 million. So we haven't heard the last of this. (28-Jan-08) Permanent Link
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Egypt's failure to close the Gaza border further destabilizes the region.

Changing events brings Israelis, Palestinians and Egyptians into further confrontation and conflict.

I'll begin with a concept that I haven't discussed in a while -- the concept of "chaotic attractors" in Chaos Theory. I used to refer to this all the time, but haven't recently. But now, the concept really fits the situation in Gaza.

Imagine that you're in the ocean, watching all the individual molecules of water swirl around you. Those molecules are going in random directions, and even if you could identify the individual molecules, you'd have no way of predicting where any individual molecule was going to go next. The movement of any particular molecule cannot be predicted at all, and yet those molecules form waves in a reasonably predictable pattern. You could, if you wanted, make reasonable predictions about the size of those waves, and how frequently new waves would reach the shore.

The waves are an example of a "cyclic attractor" in a chaotic system. The motion of the individual molecules appears almost completely random, and yet the entire collection of molecules is "attracted" to the cyclic wave patterns.

As another example, imagine you're in a blizzard, surrounded by falling snowflakes. Although the motion of each individual snowflake cannot be predicted, the mass of snowflakes are "attracted" to certain snowdrift patterns. If you recorded those snowdrift patterns historically, then you could make make a reasonable prediction about where snowdrifts would form in the next blizzard.

Generational Dynamics uses this concept of "chaotic attractor" as one of the many tools in its toolchest for making predictions and forecasts. In this forecasting methodology, the individual "snowflakes" are the millions of individual political acts that occur around the world every day. The chaotic attractors are the cyclic trends determined by generational flow over a period of decades or centuries.

An important part of the methodology is being able to distinguish the snowflakes from the snowdrifts, or the chaotic events from the trends. This is where everybody else goes wrong, and it's a major part of the Generational Dynamics forecasting methodology. Things like elections cannot be predicted. (The only time I tried was in "Does history favor George Bush or John Kerry?" during the 2004 election, which really was quite unsatisfactory.) You also can't predict the results of particular battles or campaigns.

There are many attitudes and behaviors that are cyclic as generations change, many of them identified in the 1980s by Neil Howe and William A. Strauss, the founding fathers of generational theory. These are the kinds of things that can be predicted by Generational Dynamics forecasting, as applied to large masses of people or entire generations: attitudes toward gender roles, family, parents, and protection of children; willingness to negotiate with, confront, fight or slaughter enemy groups; risk-seeking vs risk-averse vs panicky behavior; political compromise vs political confrontation; tendency to commit crimes or abuse drugs.

I use this concept all the time (usually without mentioning it) on this web site. In analyzing a particular country, I determine what the long-term generational trends are, in order to determine what the chaotic attractors are. In the six years I've been doing this, having analyzed literally hundreds of places and times in history, I've gotten a pretty good intuitive feel for what they are, and can usually explain the reasoning behind the intuition.

Furthermore, one thing I didn't fully realize when I developed this methodology in 2003 is that these chaotic attractors are VERY POWERFUL, much more powerful than I would have guessed at the time. That's why I've been able to claim that every one of the hundreds of Generational Dynamics predictions on this web site has turned out to be right or is trending right, and that not a single one has turned out wrong. Time has proven that predictions made along the lines of chaotic attractors invariably turn out right. This never ceases to amaze me, and ten years ago I would have thought that what I'm doing today was mathematically impossible.

So, to summarize previous examples of this:

So now let's turn to what is supposed to be the main subject of this article: The situation in Gaza.

And remember that this region is in a generational Crisis era, so the people are "attracted" to confrontation and war to solve problems.

The opening up of the border between Gaza and Egypt is a critical turning point in the in the attitudes and behaviors of the Gazans -- as indicated by the fact that hundreds of thousands of Gazans rushed through the open border, and many have no intention of returning. According to one UN estimate, half of the entire population of Gaza has been to the opening.

We can argue about what caused what -- did the opening of the border change the attitudes of the Gazans, or did the changing attitudes of the Gazans cause Hamas to put into effect their plan to blast through the border? We can't be sure, but at the very least, the opening of the border triggered changes in attitude and behavior that were building in the Gazan people anyway.

Since the Gazans are entering or in a Crisis era, as we try to examine the various future scenarios, we should expect the Gazans to be "attracted to" the more confrontational scenarios to be selected by the Gazans. The Gazans are headed for genocidal war, but they're not there yet. On a scale of 1 to 10 of completely compromising mood to a completely genocidal mood, they're probably at 7 or 8. So it's not surprising that they prevented Egypt from closing the border again on Friday, but it's also not surprising that there were no bloody, violent confrontations.

Bulldozer defeats Egyptians <font face=Arial size=-2>(Source:</font>
Bulldozer defeats Egyptians (Source:

The scene on Friday was very dramatic. The Egyptians announced to the Palestinians in Egypt that it was time to go home. Egyptian soldiers moved to close the border. They were stopped by huge mobs of Gazans blocking the way, and then a yellow bulldozer, operated by Hamas militants, came and smashed several more holes through the barrier. The Egyptian soldiers finally retreated.

You can watch the dramatic BBC report as it appeared live. Watch for the sudden appearance of the bulldozer:

(Once the above video finishes, a menu appears allowing you to select subsequent reports.)

As we said, this event marks a critical turning point in the attitudes and behaviors of Gazans. But it might also mark a major change in attitudes among numerous other actors in the region:

It's worth remembering that, since the 1970s, Egypt and America have kept their troops out of the Palestine region, so that they wouldn't be drawn into a war between Jews and Arabs. Now that safeguard is ending.

From the point of view of Generational Dynamics, we have several large masses of people (Gazans, Egyptians, West Bank Palestinians, Israelis), all in a generational Crisis era, almost all not explicitly wanting war but not willing to compromise on basic intentions and objectives. Ten years ago, these groups would have been "attracted to" negotiation and compromise over war. But today, with populations consisting of younger generations, these groups are "attracted to" confrontation and conflict over negotiation and compromise. That's the assumption you should make, if you're trying to predict what each of these groups will do.

As I've predicted since 2003, the Palestine region is headed, with absolutely certainty, to a new war between Arabs and Jews, refighting the bloody, violent 1949 war that followed the partitioning of Palestine and the creation of the state of Israel. As I wrote in my analysis a couple of weeks ago, there has hardly been a day since Yasser Arafat's death when Gaza hasn't descended even further into chaos than the day before, The events of the last week are certain to mean that this trend will continue. (26-Jan-08) Permanent Link
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Do people with brain disorders make better investors?

More bizarre claims from pundits who can't even figure out price/earnings ratios.

One hears so many bizarre things from the bubble cheerleaders at CNBC that it's almost a notable event when someone says something sensible.

However, what I heard on Friday morning really takes bizarreness to the level of being freakish.

The premise is this: The stock market increases of the last few years that pushed stocks well into historically high bubble territory are really "normal," and the recent downtrend in the markets is because investors are being too "emotional."

The best investors, according to these people, are those with certain brain disorders that make them unemotional. Sometimes one just can't believe one's ears, and one wonders just what brain disorders the speakers have.

Both speakers were "consultants" to investors. I infer from their remarks that their advice is most often, "Buy! Buy! Buy!" Let's see how they explain themselves.

James Grubman (top) and Darrin Farrow <font face=Arial size=-2>(Source: CNBC)</font>
James Grubman (top) and Darrin Farrow (Source: CNBC)

One speaker was James Grubman, a "psychologist and consultant to families of wealth, and an adjunct professor in the financial planning program with McCallum graduate school of business at Bentley College." (Incidentally, I've been an "adjunct professor" a few times in math and computer subjects, and what it means is that they bring you in part-time to teach a course or two.)

The second speaker was Darrin Farrow, president of Pension Builders & Consultants. (Unfortunately for him and a lot of people, he's apparently on the road to changing from a "pension builder" to a "pension destroyer.")

Grubman: A lot of investors are really reacting to panic and fear that is feeding on itself, and so this is a time when understanding what your risk tolerance is and being able to tolerate some of the anxiety about the markets is really very important to keep your head about you.

Farrow: I think we're finding herd mentality taking place. If you look at the fundamentals, the P/E's are very fair. If you look at 2007, the S&P had a P/E of under 16, which means the fundamentals are strong - the market may be undervalued. But because we tend to be more emotional when we buy and sell stocks, the subprime fears and the unknown are making people sell stocks. Whereas, conversely in 1999, when you had the technology forming, you had P/Es upwards in the 30s and 40s. People were buying because it felt good, but you look at the fundamentals, they should have been selling. So unfortunately, people pay more attention to how they feel than the fundamentals, which is what they should be paying attention to.

[[This stuff about P/Es, or price/earnings ratios, is total, utter, blithering nonsense, as we'll describe below, from a person who earns a living by advising other people how to invest. His clients would be better off with a dart board.]]

Unfortunately 80% of buying decisions are based on emotions, and our emotion directly contradicts the fundamentals of prudent investing.

Grubman: There's some interesting research that shows that people who actually have too little emotion because of brain disorders sometimes do better at investing, because they're not tossed around by how they're feeling. We also know from certain research in behaviorial finance that people feel losses much more strongly -- 2½ times more strongly -- than they're happy about gains. So a drop in the market of 1000 points would have to be matched on the upside by almost 2500 points to have the same level of emotion. We really hate to lose money.

[On outsourcing the management of one's portfolio.] Well, many wealthy investors and high net worth investors do do that by using wealth managers, and I've been talking to many of the wealth managers that I consult to in the past week, checking with them. And they're actually finding that their clients are not calling as much, but I find that the advisors themselves are more nervous for their clients' money.

[[This is an interesting touch. "If your advisor tells you to sell, then he's just being emotional. Hire me as your consultant and advisor instead, and I'll tell you to buy."]]

Farrow: [On being less emotional about investing.] I think passive management is probably the route to go. Active managers, even portfolio managers, tend to buy into emotion and the same fears and overconfidence that the lay person does. Passive management, index investing is where they should be looking.

Let's start with the S&P Price/Earnings index.

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 January 18 version of the chart:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 18-Jan-2008. <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 18-Jan-2008. (Source: MarketGauge ® by DataView, LLC)

Now, Farrow says,

"If you look at the fundamentals, the P/E's are very fair. If you look at 2007, the S&P had a P/E of under 16, which means the fundamentals are strong - the market may be undervalued."

Well no, this is nonsense in several different ways:

Now let's go on to another portion of Farrow's statement:

"Whereas, conversely in 1999, when you had the technology forming, you had P/Es upwards in the 30s and 40s. People were buying because it felt good, but you look at the fundamentals, they should have been selling."

This is about as silly as you can get. If you look at the above graph, then by his reasoning, you should have been selling throughout the whole period, perhaps only buying again near the beginning of 2005.

Well, he can't be that stupid. This is a pretty clear indication that Farrow is simply a liar, a person who makes up facts in order to get fat commissions from his wealthy clients. This is the same thing that's become common these days -- from investment banks, hedge funds, ratings agencies, or bond insurers. It's perfectly OK to defraud your clients or the public, as long as you can get a fat commission for doing so.

As I've said many times, if you really want to look at "fundamentals," then you can look that the following graph of P/E ratios back to 1871:

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

As this graph shows, the historical P/E ratio averages around 14, and has gotten as low as 5-6 several times in the last century, most recently in 1982. It experienced an enormous spike, starting in 1995, and is now clearly poised to fall again to the 5-6 range. This would push market prices well below the Dow 4000 range.

Finally, let's take another look at Grubman's comment:

"There's some interesting research that shows that people who actually have too little emotion because of brain disorders sometimes do better at investing, because they're not tossed around by how they're feeling."

This comment about brain disorders is absolutely hilarious.

What's interesting about this is that these two people are lying through their teeth because their incomes depend on it, which means that they're operating totally on emotions, not on fundamentals.

I guess the moral to this story is the following: If you're going to pay a consultant to give you advice about investments, then make sure the consultant has a brain disorder. (25-Jan-08) Permanent Link
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Large US banks are pressured to bail out bond insurers

The news drives an explosive 600 point (5%) spike in the Dow Industrials, from the intraday low of 11675 to close at 12270, almost 300 points or 2½% above the open.

DJIA, January 23, 2008 <font face=Arial size=-2>(Source: Yahoo)</font>
DJIA, January 23, 2008 (Source: Yahoo)

The surge came when Financial Times reported that the largest US banks are under pressure from New York State insurance regulators to provide as much as $15 billion to bail out bond insurers, the largest of which are MBIA Inc and Ambac Financial Group.

Please read the new article I just posted: "A primer on financial engineering and structured finance."

This article provides numerical examples and diagrams to explain the various techniques used by financial engineers to create CDOs and other structured finance investments. It shows how a BB rated security can be transformed into an AAA rated security by various magical techniques, including the use of bond insurers.

The effect on investors was electric.

The markets had opened sharply lower, falling as much as 300 points (Dow Industrials) when the news was announced. Markets spiked immediately, continuing to a 600 point surge, to close 300 points above the open, for close to a 3% gain.

Ebullient pundits predicted that the market had "found a bottom."

However, the highly emotional swings, during a general down trend, is part of the 1929 pattern that led to a crash. If you 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 euphoria and laughter of investors on that day. And the stock market continued to gain throughout that entire week, but crashed two weeks later.

From the point of view of Generational Dynamics, generational stock market panic and crash is overdue, and must happen, since the stock market is overpriced by a factor of almost 250% (like 1929). It might happen next week, next month or next year, but the patterns that have occurred since January 1 indicate that it might be close. (24-Jan-08) Permanent Link
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In dramatic scene, 60,000 Gazans pour into Egypt through holes blasted through border wall

Euphoric Gazans go shopping, bring back food, fuel and fertilizer.

Gazans pour through hole blasted in border wall with Egypt. <font face=Arial size=-2>(Source: BBC)</font>
Gazans pour through hole blasted in border wall with Egypt. (Source: BBC)

According to reporting by the UK Times Online, the destruction of the border wall separating Gaza from Egypt at Rajaf was the culmination of six months of clandestine work by Hamas militants, cutting through the metal fence and laying explosives. The explosives were set off in 17 different places early Wednesday morning, effectively destroying two-thirds of the entire border wall.

The news spread quickly, and within a few hours Gazans were pouring through the holes into Egypt in a wild party atmosphere.

According to a Telegraph reporter on the scene:

"First came the teenagers, curious to see what would happen to them on a border where, until very recently, they could expect to be shot on sight.

Then came the smugglers, aware a good turn was to be made on cigarettes bought in Egypt for £9 a carton but sold in Gaza for nearer £25.

Finally came crowds and crowds of normal Gazans, men and women, old and young, some on bicycles, a few being pushed in wheelchairs, simply enjoying the rare sensation of freedom.

And somewhere in the teeming crowd, came people anxious to exploit the day for their own less innocent purposes.

Fertiliser, broken down into half bags for lugging through the many tunnels that arms smugglers normally use for delivery into Gaza, was to be seen as it was manhandled overland.

It was white, oily, crystalline and a dab on the tongue left a sharp, burning sensation.

In most countries fertiliser has a perfectly innocent function but in Gaza militants use it to make explosive."

Euphoric Gazans carry goods back to Gaza from Egypt. <font face=Arial size=-2>(Source: Der Spiegel)</font>
Euphoric Gazans carry goods back to Gaza from Egypt. (Source: Der Spiegel)

This is why the Israelis are going to be extremely anxious over this border crossing opening. The open border presents opportunities to Hamas terrorists to import more sophisticated equipment and materials for making bombs, rockets and missiles.

However, for the Palestinians it was a welcome opportunity to get out of their "open air prison" and make contact with other people.

Egyptian President Hosni Mubarak said that he had ordered the border guards to allow the Palestinians to cross into Egypt because they were starving. "I told them to let them come in and eat and buy food and then return them later as long as they were not carrying weapons," he said.

However, there's no actual evidence that any Gazans are starving.

One thing that I found startling is that a number of news stories about this event portrayed it mainly as a public relations event.

A Newsweek story says: "Over the last few weeks, the Islamists have looked much more adept at playing the public-relations game, using powerful television images to stoke international sympathies."

A Reuters story quotes Danny Ayalon, Israel's former ambassador to the United States, as saying that, "This was a resounding failure, a public relations disaster," he said.

However, it's hard for me to see this as anything less than a major change in the Palestinian situation, perhaps comparable in importance to Israel's withdrawal from Gaza in 2005.

From the point of view of Generational Dynamics, an event that has this big a change in the attitudes of a large mass of people can cause a very substantial political stage. As I discussed last week, every event, almost without exception, that's occurred in this region since the death of Yasser Arafat has only increased the level of chaos, and there's no reason to assume that this won't do the same.

Here are some things to watch out for in the next few hours, days and weeks:

When you really think about it, there's no scenario where this event adds to the stability of the region. It's hard to see a return to the status quo ante, with the border closed and no change to the plight of the Gazans. So something is going to change, and it's bound to be destabilizing.

The first major international prediction that I posted on this web site was on May 1, 2003, just as President Bush was advocating the new "Mideast Roadmap to Peace" that called for a Palestinian state alongside Israel: "Will Mideast roadmap bring peace?" In that article I predicted that the Roadmap for Peace would never work, and that the Mideast would descent further into chaos, especially after Yasser Arafat disappeared, and that there would be a new genocidal war between Jews and Arabs, refighting the genocidal war of 1949 that followed the partitioning of Palestine and the creation of the state of Israel. That prediction has been on track since I made it, and it's hard to see how the blasting of the border wall with Egypt can do anything but help the chaos along. (24-Jan-08) Permanent Link
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Bird flu spreading rapidly through birds in West Bengal in eastern India

Over 2300 people have complained about symptoms of fever in the last 5 days.

However, the West Bengal state government says that there has been no case of H5N1 bird flu virus affecting humans.

The problem is that West Bengal does not have the required infrastructure to make that determination, according to officials in Delhi. "The West Bengal Government is failing to understand the gravity of the situation," said Union Minister of State for Health and Family Welfare P Lakshmi.

What is NOT in doubt is that the deadly H5N1 virus is spreading rapidly from district to district in West Bengal.

Less than 200,000 thousand birds in the infected areas have been culled (killed) so far, and West Bengal has has appealed to other states to help cull 2 million birds.

There's great fear that the virus has already spread to the city of Calcutta, with five million people. Portions of border with Bangladesh have been closed in an attempt to prevent spread to that country, though it may already be too late.

Iconoclastic flu researcher Dr. Henry Niman has said on his Recombinomics web site that the official figures released by West Bengal indicate that testing has been so limited that there's no way to know what's going on:

"The mortality numbers increased 5,915 over the prior report, but the number of samples received is withheld. Yesterday’s report showed that only 22 samples were received, even though almost 10,000 birds died.

Some media reports have indicated North 24 Parganas was the eighth West Bengal district to test positive for H5N1, but the comments above again indicates that both North 24 and South 24 are negative, although both districts have reported large increases in dead poultry.

The continued reporting of negative data on a minimal number of samples from districts with increasing numbers of dead poultry raises pandemic concerns. These concerns regarding testing of poultry also applies to human samples, which have never produced a confirmed positive."

According to Niman, this is the kind of carelessness that can lead to a mutation that will result in a human pandemic.

It was two seasons ago that bird flu spread like wildfire across Asia, into the Europe, the Mideast and Africa. It was expected that it would soon spread to North America via the Atlantic flyways, but miraculously that apparently hasn't happened.

We're now approaching, once again, the most dangerous time of the year for a possible human pandemic. That's because the Chinese New Year and Vietnamese lunar new year (Tet) celebrations are approaching. At these times, many people are travelling, and huge amounts of poultry are transported, slaughtered, and consumed.

Bird flu virus mutation is basically a numbers game. A human to human transmissible virus will be formed when somebody simultaneously gets the ordinary human flu and the pathogenic H5N1 bird flu at the same time. At that time, the genes from the two forms of the virus can recombine to form an H5N1 virus that can move easily from human to human.

What makes this most dangerous time of the year is that there are far greater numbers of recombination opportunities that could make a pandemic possible. That's true not only because of the Chinese and Vietnamese celebrations, but also because of the rapid spread of the virus throughout West Bengal, and possibly into Bangladesh.

As I always have in the past, I once again remind the reader that it's impossible to predict when a particular mutation will permit easy human-to-human transmission, which would result in a worldwide pandemic. This could happen next week, next month, next year, or thereafter.

Once again, as I always say, you and your family should prepare immediately for a possible pandemic. If human to human transmission became public next week on Monday, then by Tuesday all the shelves in grocery stores would be bare. If you stock up on food now, then you'll be sure to have what you need. Even if you think that you can beat the crowds to the grocery store, you should still stock up in advance. If you get your canned food after the panic begins, then you're depriving somebody else of food. But if you stock up in advance, then the shelves will be restocked, and you won't deprive someone else of food.

I once again strongly urge my readers to prepare for an H5N1 pandemic or for any kind of emergency (think of hurricane Katrina) by stocking up on food and water and currency and batteries for the entire household to live on for 2-3 months. This may cost a thousand dollars per person, but it's not wasted money since you can always eat the food later if no emergency occurs. Get canned or dried food that can last a long time in storage, and get a large container for storing water. Keep in mind that stored water becomes impure with time, so you'll also need some purifying tablets or bleach to kill bacteria in the water when the time comes. Finally, get whatever medicines you'll need to take care of yourself and your family for a long period of time. (23-Jan-08) Permanent Link
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CNBC pundits believe that the worst is over in the stock market

Tuesday was a "great day for the bulls" because the market opened by moving down 460 points (Dow Industrials), but then ended the day down only 128 points.

That means that there was a "nice rally" of 330 points, which makes it a good day.

This is the kind of reasoning that makes my head spin. The market has been down almost every day this year, but today was a good day because it fell ONLY 128 points on a day when the Fed made a historically huge emergency interest rate cut.

And remember Najarian, the guy I quoted a few days ago about a "volatility explosion" on Tuesday. (Actually, he was dead right about that; volatility was huge.)

Well, after the market closed on Tuesday, Apple computer announced quarterly earnings in line with expectations, but projected next quarter's outlook as substantially below expectations, because of poor iPod sales during the holiday season. Apple stock fell sharply in after-hours trading. (This paragraph corrected on 24-Jan.)

According to Najarian, this is a GREAT buying opportunity. Why? Because the price/earnings ratio on the stock has fallen .... wait for it .... BELOW 25!!

It doesn't matter to Najarian that this historical average for price/earnings ratios is around 14, and that Apple has been way above average for a long time, meaning that it's got a much further distance to fall.

As I said, it makes my head spin.

These people just never cease to amaze me. Are they really so unable to think? Are they so unable to grasp a time window longer than few hours or a few days?

Calling a bull market because of a "nice rally" several hours old is bizarre. Calling a stock cheap because its P/E has gone from collossally high to only gigantically high is nuts.

At any rate, the emergency Fed cut appears to have helped out Europe stock markets, which opened sharply lower, but closed 2-3% up following the Fed rate cut.

However, Wall Street is still on track in following the 1929 patterns of continual tumbles in a market most investors had all be counting on continual increases. The Dow Industrials are now down another point to 16% below their highs, or 84% of the October 7 high.

Let's speculate. 84% was exactly the point where the crash began in 1929, as you can tell from my Dow Jones historical page. Each time the market falls another percentage point from the high, more and more investors become exposed. What happened in 1929 when 84% was reached was that the market was at a "tipping point," where investors were forced to sell to cover their substantial margin calls and leverage calls. However, the 84% point was reached after only six weeks in 1929, while it took 15 weeks in 2007-08 to reach the 84% point, which would have given some companies more time to cover their losses. On the other hand, leveraging is much greater today than in 1929. So who knows? But unless the continuing market fall starts reversing itself, then it shouldn't be too much longer until a "tipping point" is reached. (22-Jan-08) Permanent Link
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Israeli blockade of Gaza triggers protests against Egypt

Angry Gazans stormed the Rafah crossing into Egypt on Tuesday, four days after Israel had imposed a total blockade on Gaza. The blockade was imposed in response to increases in rocket and missile attacks from Gaza on Israeli border towns.

Dozens of Palestinian protesters stormed the Rafah border crossing with Egypt, demanding that the frontier be opened to ease the blockade imposed on the territory by Israel. However, the protesters were almost all women, and so the protest may have been a public relations exercise.

The protestors chanted insults at Egyptian President Hosni Mubarak: "Hosni Mubarak you are a coward, you are an agent for the Americans. Gaza women will not be humiliated."

Gaza City was in total darkness, since there was no fuel for the electric power generators. Because of international concern over the blockade, Israel ordered an easing of the blockade on Tuesday. Apparently this easing triggered new attacks by Gaza militants, as Palestinian snipers targeted Israeli farmers near the border, and a new flurry of rockets was launched.

Israeli Defense Minister Ehud Barak hinted at an escalation against Gaza: "We must use more and more pressure on Gaza. "What is important is the safety of the residents of the western Negev and Sderot."

It appears that the level of anxiety, already high, is moving even higher among both the Israelis and the Gazans. The Gazans are increasingly anxious and angry about their plight, living in Gaza, which they call an "open air prison." The Israelis are getting increasingly anxious and angry about the rocket and missile attacks, which can only become deadlier as Gaza militants import more sophisticated parts.

For the time being, there's a great deal of frustration on both sides. There's no way for Israel to prevent rocket attacks -- certainly the blockade will not do so. And there's no way for the Palestinians to get the blockage lifted completely -- certain sending rockets will not do so.

It's like an argument between husband and wife where he's complaining about her mother, and she's complaining about money, when what they're really complaining about is sex, but neither wants to mention it.

Still, the fact that the most we saw in terms of mob action was a protest by women at the Rafah gate indicates to me that the war between Jews and Arabs is not yet imminent. This may be the case simply because Gazan rockets and Israeli blockades are affecting the quality of life, but so far are not causing any substantial harm to either side.

The demonstrations against Egypt are an interesting development, however. These demonstrations may embolden militants in the Egyptian terrorist group Muslim Brotherhood, a group that might be called Hamas's cousin. If Egypt becomes destablized, either because of Muslim Brotherhood or because of the approaching worldwide financial crisis, that could be the trigger that starts the war.

From the point of view of Generational Dynamics, a new war between Arabs and Jews is an absolute certainty, refighting the bloody war of 1949 that followed the partitioning of Palestine and the creation of the state of Israel. This war could begin next week, next month or next year, and the exact scenario cannot be predicted, but the end result is certain. (22-Jan-08) Permanent Link
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Fed makes emergency ¾% interest rate cut, fearing market rout

Initial market reactions appear to have been minor.

At 8:20 am, the Fed cut the Fed Funds rate by ¾% to 3½% from 4¼%.

The emergency announcement appeared to be a reaction to blowouts in foreign markets.

Asian markets had closed 7-8% down on Tuesday, after falling 4-5% on Monday. European markets had fallen 6-7% on Monday, and were down slightly on Tuesday. Canadian and Latin American markets had fallen 5% on Monday.

Wall Street was closed on Monday, but Fed futures indicated that the that Dow Industrials would be down 513 points at the open.

Once the rate cut was announced there was an immediate "bounce," but it's being called a "dead cat bounce," because it didn't turn the market positive, thought it did make it less negative.

The following table indicates the market futures until 9:30 am, and then the indexes after market open:

                ------------- Futures --------------     Market Open
Time (Tue am)   8:15    8:21    8:47    9:02    9:15    9:35    10:00
--------------- -----   ----    ----    ----    ----    ----    -----
Dow Industrials -513    -156    -283    -481    -418    -439     -266
Nasdaq 100       -90     -51     -38     -82     -70    -108      -62
S&P 500          -68     -42     -38     -60     -53     -51      -32

There was a debate among pundits as to whether this emergency rate cut was a good idea. The argument AGAINST the rate cut is that some people wanted a sharp fall in the markets, so that all the "bad stuff" could be "cleaned out." Some pundits claim that the economy will "grow like gangbusters" in the last half of the year.

Several things are apparent:

From the point of view of Generational Dynamics, the stock market bubble has been leaking for several months, and the leak is turning into a blowout. Absolutely nothing can stop this.

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.

These are called "generational crashes" because they occur every 70-80 years, just as the generation of people who lived through the last one have all disappeared, and the younger generations have resumed the same dangerous credit securitization practices that led to the previous generational crash.

We're now overdue for the next generational crash, and it might occur tomorrow, next week, next month, or next year. However, based on the current market situation, the possibility should be considered that it's imminent. (22-Jan-08) Permanent Link
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The nihilism and self-destructiveness of Generation X

Who's more to blame for our troubles: The Boomer generation or Generation X?

I've had some reader complaints about my criticisms of Generation X, so I thought that a more thorough treatment was in order. I'll discuss the specific reader complaints towards the end.

Boomers and Lenscap Stupidity

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I've never hesitated to criticize Boomer politicians, journalists, analysts and pundits for the really stupid things that they say and do. I've frequently criticized Ben Bernanke for his simplistic view of macroeconomics. And when Senator Joe Biden appeared on Meet the Press, saying one unbelievably stupid thing after another, I was very critical. The Neocon strategy of democracy through invasion is nonsense.

Israel's Defense Minister Amir Peretz (right) looks through binoculars with the lens cap on. On the left is the army's new Chief of Staff, Lt. Gen. Gabi Ashkenazi. They're reviewing a military drill in the Golan Heights. <font face=Arial size=-2>(Source:</font>
Israel's Defense Minister Amir Peretz (right) looks through binoculars with the lens cap on. On the left is the army's new Chief of Staff, Lt. Gen. Gabi Ashkenazi. They're reviewing a military drill in the Golan Heights. (Source:

The poster "child" for Boomer stupidity is Amir Peretz, who was Israel's Defense Minister last February. When this happened, I named Peretz as the idiot of the week. In the scene photographed above, Peretz is reviewing a military drill in the Golan Heights. The army's new Chief of Staff, Lt. Gen. Gabi Ashkenazi, is explaining what's going on and pointing out the manoeuver's fine points. Several times, Peretz raises his binoculars and looks through them, but of course he can't see anything because the lens cap is on.

This is the perfect prototypical example of the stupidity of Boomers today. They don't know what's going on in the world, so they make up "facts" as they go along. They don't WANT to know what's going on in the world, because not knowing gives them certain advantages and tranquilizes their anxieties.

This example is so compelling, I'm going to use the phrase Lenscap Stupidity to refer to this kind of behavior in Boomers.

The disaffected Xers

It's not surprising Xers are furious at Boomers. From the point of view of Generational Dynamics, Generation-Xers are in the "Nomad" archetype. The Nomads were identified by Neil Howe and William A. Strauss, the founding fathers of generational theory, as the generation born during a generational Awakening era, like America in the 1960s and 1970s. The previous American Nomad generation was the "Lost Generation," born during the Awakening era of the 1890s and 1900s decades. Like today's Generation-Xers, the Lost Generation was disillusioned, disaffected and angry, contemptuous of everything that came before, and recklessly willing to destroy it.

This Xer hatred of Boomers runs very, very deep.

According to a New York Times article early in 2007, Generation-Xer Barack Obama believes that Americans are sick of feuding Boomers, and ready to turn to Generation X, "after the campus culture wars between freaks and straights, and after young people had given up on what überboomer Hillary Rodham Clinton called in a 1969 commencement address a search for 'a more immediate, ecstatic and penetrating mode of living.'"

"In the back and forth between Clinton and Gingrich, and in the elections of 2000 and 2004," writes Obama in his book, The Audacity of Hope, , "I sometimes felt as if I were watching the psychodrama of the baby boom generation — a tale rooted in old grudges and revenge plots hatched on a handful of college campuses long ago — played out on the national stage."

He's not alone in that view. Here's what Democratic Party strategist and Clinton aide Paul Begala has written:

"I hate the Baby Boomers. They're the most self-centered, self-seeking, self-interested, self-absorbed, self-indulgent, self-aggrandizing generation in American history. As they enter late middle age, the Boomers still can't grow up. Guys who once dropped acid are now downing Viagra; women who once eschewed lipstick are now getting liposuction."

Well, Begala's certainly wrong about one thing: The Boomers, the generation born right after WW II, is not "most self-centered, self-seeking, self-interested, self-absorbed, self-indulgent, self-aggrandizing generation in American history." The Missionary Generation, born right after the Civil War, was just as self-centered, self-seeking, self-interested, self-absorbed, self-indulgent and self-aggrandizing.

Another way of viewing the Xer hatred of Boomers is to look at their music legacy. For the Hero Generation of World War II, music was an escape from the horrors of the Depression and the War; for the Silent Generation, it sweet love ballads about getting on with life again; for Boomers, it was protest music.

So it's really quite a shock to see some of the nihilistic music popular among Generation-Xers, and it conveys the deep hatred they have for Boomers. Let's look at some examples of some lyrics:

The artist Slayer's 1986 song, "Raining blood (Reign in Blood)" contains the following lyrics, which appear to me to be a warning to Boomers of coming retribution:

"Trapped in purgatory
A lifeless object, alive
Awaiting reprisal
Death will be their acquisition

The sky is turning red
Return to power draws near
Fall into me, the skys crimson tears
Abolish the rules made of stone

Pierced from below, souls of my treacherous past
Betrayed by many, now ornaments dripping above

Awaiting the hour of reprisal
Your time slips away

Raining blood
From a lacerated sky
Bleeding its horror
Creating my structure
Now I shall reign in blood!

A similar theme can be found in the 1994 song "Mr. Self Destruct," by Nine Inch Nails, some of whose lyrics are as follows:

"I am the voice inside your head
and I control you
I am the lover in your bed
and I control you
I am the sex that you provide
and I control you
I am the hate you try to hide
and I control you ...

I am the needle in your vein
I am the high you can't sustain
I am the pusher I'm a whore
I am the need you have for more
I am the bullet in the gun
I am the truth from which you run
I am the silencing machine
I am the end of all your dreams
I take you where you want to go
I give you all you need to know
I drag you down I use you up
and I control you
Mr. Self-destruct

Finally, "No Surprises," the 1997 song from Radiohead, exhibits similar disaffection, though less dramatically:

"A heart that's full up like a landfill
A job that slowly kills you
Bruises that won't heal

You look so tired and unhappy
Bring down the government
They don't, they don't speak for us
I'll take a quiet life
A handshake of carbon monoxide

You know, there are still some people who doubt the validity of generational theory, and believe that one generation is pretty much the same as another. I don't seen how anyone can still believe that, after examining the world views of the different generations through their music.

Nihilism and Generation-X

Kids of the generational "Nomad" archetype grow up during the social turmoil of the Awakening period, and become angry, disaffected youth. Throughout Anglo-American history, the Nomads have been shown to have the highest crime rate. They spend their lives in the shadow of the powerful Prophet generation (like America's Boomers). The Prophets excoriate the disaffected Nomads, and the Nomads return the favor by hating the older Prophets. And the Nomads end up being more powerful than the Prophets during the next crisis war, because Nomads lead the younger Hero generation into the next Crisis war. Remarkably, some of the world's worst dictators are early Nomads (born 16-25 years after the end of the last crisis war), including Adolf Hitler, Josef Stalin, Leon Trotsky, Osama bin Laden, Abu Musab al-Zarqawi, and Shamil Basayev (the guy who masterminded the 2004 Beslan school massacre.) While Prophets are talkers and complainers and sometimes visionaries, Nomads are pragmatists and doers, and they implement the programs that lead the nation through the next crisis war.

I used the word "Nihilistic" to describe Gen-X music in the section above. It's worth noting that there are several definitions of Nihilism, falling into two categories that we might describe, using the terminology of bipolar disease, as the "depressive" category and the "manic" category.

The "depressive" category of Nihilism was the original philosophical view that life was meaningless and empty, along with the denial of real existence. There are variations of this that question whether life exists or, perversely, anything BESIDES life exists.

But the one we're most interested in is the "manic" category.

It began in Russia in the 1860s as a "Nihilist Movement," reacting to Russia's humiliating loss in the Crimean War in the 1850s. According to this movement, existing social and political institutions must be destroyed in order to clear the way for a new state of society.

Although the original movement ended, Nihilism in this form permiated the Russian Revolution. Stalin and Trotsky destroyed every Russian institution possible to bring about Communism as a form of government, and led Russia into more than a decade of bloody civil war. Adolf Hitler was so destructive that he's sometimes referred to as a nihilist. Osama bin Laden is in Saudi Arabia's last Nomad generation.

I'm approaching the subject this way in order to emphasize the power of Nomads, as contrasted with the Prophet generation that they follow.

If many of the villains of World War II were Nomads, then so were many of the heroes: Franklin Roosevelt, Dwight Eisenhower, Charles de Gaulle, for example.

It's the Nomad generations, like Generation-X, that push the world forward -- not through words and ideas, but by force and war.

In today's America, a good example of destructive nihilism is, the radical left Gen-X wing of the Democratic Party.

At their time of maximum strength around the end of 2006, the Xers in drove the party into the most destructive and self-destructive of policies -- a determination to do everything possible to cause an American loss and humiliation in Iraq. This policy was destructive to America, destructive to the Democratic Party, and destructive to the individual Democrats who are being forced to support that policy. The Boomer Democrats appeared to be completely helpless at this Xer onslaught. They feebly exhibited passive destruction and self-destruction, as the Xers practice active destruction and self-destruction.

Finance: From Lenscap Stupidity to Nihilism

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

The world is facing an imminent financial crisis, the climax of the creation of a series of huge bubbles, starting with the dot-com bubble of the late 1990s, and continuing with a real estate bubble, a stock market bubble, a commodities bubble, a liquidity bubble, and a credit bubble. All of these bubbles are currently leaking and about to burst.

In an article that I wrote in November, I broke this process of bubble creation into two parts, one led by Boomers and one led by Gen-Xers. In brief, here are the two parts:

Once you really begin to understand what's going on with securitization of credit, structured finance, credit derivatives and CDOs, you realize what a totally debauched, depraved and abusive design they are. This is no simple passive mistake -- that's what the dot-com bubble was. This was a massively destructive and self-destructive financial architecture, devised by a generation with a hate-filled and Nihilistic view of life. This was active destruction at its most debauched and depraved, condoned by Boomers who were making too much money to want to stop the destruction.

Much of what the Xers did was fraudulent, illegal, and contemptuous of the entire global financial system. I've pointed out several examples of fraud on this web site, especially fraudulent methods used to avoid having to apply "mark to market" to overpriced CDOs.

You might argue that the financial engineers didn't realize the consequences of what they were doing in 2003, 2004, 2005 or 2006, but the fraudulent practices only accelerated in 2007, and by that time there could no doubt that they knew what they were doing, knew that they were screwing investors for their own gain, and were damaging the entire financial system.

We're not talking about any overt conspiracy here. This is all generational. Generation-Xers share an enormous hatred for Boomers, and enormous contempt for anything that Boomers do or believe. The fraudulent actions taken by individual Xers were not conspiratorial, but were massively performed behaviors of an entire generation, based on shared attitudes and beliefs.

Examples from the computer industry

I became a computer industry consultant in the late 1970s, and have worked for dozens of clients over the years.

I had worked for Digital Equipment Corp. (DEC or Dec) as an employee for most of the 1970s, when DEC was producing a wide range of leading edge technical products, led by its wildly popular PDP minicomputer series. The Hero and Silent generations from WW II were in charge. Corporate discipline was high, people worked late, management control was strict, and morale was high.

In 1994, I returned to Dec for a few months as a consultant. Dec's products were struggling. Dec's VAX minicomputer product line was aging, and other product lines were being discontinued. The Boomers were in charge. Management control was weak, and morale was low.

I was appalled by what I saw. With Ken Olsen gone, the project supervisors and managers were obviously frightened to death of being laid off. I witnessed conversations where managers lied to upper management, hiding development problems, and giving the appearance of being on time, on schedule, when that was far from the truth. The culture was rife with lying to upper management -- open lies to upper management that everyone knew were lies except the VP.

Did the VP know they were lying? At the time, I thought not, but today I do. This is how "Lenscap Stupidity" works. As I think back over the conversations I witnessed, it now seems clear to me that the VP realized that the supervisors were lying, but didn't want to know.

I was absolutely appalled by this widespread dishonesty at a company that I'd worked for for so many years, and was shocked by how the DEC corporate culture had become so corrupt. DEC was becoming rotten to the core. Not surprisingly, it was just four years later, in 1998, that DEC went completely out of business, acquired by Compaq Computer Corp. (which itself was acquired by Hewlett-Packard in 2002).

How could any company have avoided the internal rot and decay that came with the rise of the Boomers to top level management positions in the 1990s? At the very least, it requires top level management to avoid Lenscap Stupidity by forcing full accountability at every management level.

The experience of IBM in the 1990s contrasts sharply with that of DEC.

In the 1980s, IBM had achieved what many thought was almost a miracle -- The IBM PC was the gold standard for personal computers, the AS/400 had been a highly successful minicomputer product line, and IBM mainframe product line ran businesses around the world.

However, like DEC's products, IBM's products lost their luster in the early 1990s. The PC was commoditized, so there was no longer any profit to be made. Minicomputers were losing out to Unix servers. And even IBM's core mainframe business was losing sales to multi-processor Unix systems that could perform dozens of operations simultaneously.

Developing a new mainframe architecture is INCREDIBLY complicated. In the 1970s and 1980s, it was typical for IBM to have ten or twenty new mainframe development projects going on simultaneously, because the failure rate was so high. A new mainframe system probably had R&D costs in the billions of dollars (which doesn't seem like much in today's bubble-ridden world, but was real money in the 70s and 80s.) A typical reason for one of these projects to fail is that after spending tens or hundreds of millions to develop a prototype, they discover that the computer runs 5-10% slower than they had anticipated. That's enough to completely kill a mainframe project, and force a complete restart.

In 1994, around the time that I was observing the Lenscap Stupidity at DEC, it looked like the end of the road for IBM, and few people at that time thought that IBM would survive long. The widespread view was that the mainframe computer that formed the heart of IBM's business was a dinosaur that would soon be obsolete.

Whereas DEC never found a suitable successor to Ken Olsen, IBM brought in a top level executive from the outside.

Here's how IBM's web site describes the situation:

"During the 1980s and early 1990s, IBM was thrown into turmoil by back-to-back revolutions. The PC revolution placed computers directly in the hands of millions of people. And then, the client/server revolution sought to link all of those PCs (the "clients") with larger computers that labored in the background (the "servers" that served data and applications to client machines). ...

Louis V. Gerstner, Jr. arrived as IBM's chairman and CEO on April 1, 1993. For the first time in the company's history IBM had found a leader from outside its ranks. Gerstner had been chairman and CEO of RJR Nabisco for four years, and had previously spent 11 years as a top executive at American Express.

Gerstner brought with him a customer-oriented sensibility and the strategic-thinking expertise that he had honed through years as a management consultant at McKinsey & Co. Soon after he arrived, he had to take dramatic action to stabilize the company. These steps included rebuilding IBM's product line, continuing to shrink the workforce and making significant cost reductions. Despite mounting pressure to split IBM into separate, independent companies, Gerstner decided to keep the company together. He recognized that one of IBM's enduring strengths was its ability to provide integrated solutions for customers - someone to represent more than piece parts or components. Splitting the company would have destroyed a unique IBM advantage."

IBM got through that crisis for two obvious reasons. First was account control, which was always a large part of IBM's success. And second, IBM was able to show that new generation IBM mainframes could substantially outperform multi-processor Unix systems in very high transaction environments. IBM spent mind-bogglingly large amounts of money to develop these systems, and it paid off in the company's continued survival.

But the major reason is that he didn't succumb to Lenscap Stupidity. He forced management at every level to be accountable for everything they did.

As a computer industry consultant since the late 1970s, I've worked for dozens of clients, and I've noticed one questionable policy that occurred several times. When I work as subcontractor to a contracting firm, if I really dig into a software development project and get it done faster than expected, this can often really ANNOY the managers I'm working for, since getting something done quickly means that they can no longer continue charging time to their client. They'd rather see a project take longer than expected, so that they can hire more subcontractors and charge more time to the client.

However, none of this compares to what I've been seeing more recently.

In the last couple of years, Gen-Xers are replacing Boomers as managers at increasing rates. The Lenscap Stupidity that I witnessed at DEC in the 1990s is nothing compared to the Gen-Xer Nihilism that I saw at one midsized computer industry company that I spent a few months working for. I won't provide the real name, at least in this article, so I'll just call it

I've had dozens of computer industry clients in my career, but these were the two stupidest people I've ever seen trying to run a software development group. The supervisor had absolutely no technical understanding of the system, even though she herself had previously written some of the software. Her manager knew even less than she did, and was contemptuous of the company's product development and customer relationships. There was more concern about social relationships than there was about meeting customer needs.

There were many similarities between Dec and iWidgets: There was massive dishonesty across several departments that I saw, openly lying to upper management, and Lenscap Stupidity of upper management who purposely closed their eyes to what they knew (or must have known) were lies.

But there was a big difference between Dec and iWidgets. The supervisors at Dec were trying their best to get products completed on time; when development ran into trouble, the supervisors lied about the problems and upper management ignored the lies in an exercise of lenscap stupidity. This resulted in the company going completely out of business within four years.

But the supervisors at iWidgets went much farther, following the pattern of Generation-X Nihilism. They were openly contemptuous of their own product development and their own customer relationships, even to the point of sabotaging them. The supervisors lied about their reckless behavior and upper management ignored the lies in an exercise of Lenscap Stupidity and Lenscap Nihilism. What's even worse, this company is working on contracts for Homeland Security, and so our entire country is in danger from the Gen-X Nihilism at this company.

This is what characterizes many in Generation-X today -- fury and hatred directed at Boomers, utter contempt for everything that came before, and a recklessly eager willingness to destroy it for personal gain or perceived personal gain. Instead of a customer-centered approach, customers are treated as contemptuous morons.

We see it in anecdotes that have been posted on the internet in the last few months in the finance and mortgage lending industries: Someone complains about fraudulent practices and is fired; stockbrokers and securities salesmen having open discussions about lying to customers, and "jamming" worthless securities down their throats; encouraging people to lie about income on their mortgage applications; selling adjustable rate mortgages (ARMs) with teaser rates, knowing that the customer will lose his home; and, incredibly, at the end of last year, subprime mortgage firms that hold off ending the business until January, so that year-end bonuses can be paid.

Whether it's a company in the computer industry, the finance industry, the real estate industry, or any other industry, the Nihilistic pattern is the same: Fraud committed by Gen-Xers; Boomer managers who are aware of the fraud, but exercise Lenscap Stupidity, pretending not to know.

A company like iWidgets, which is permeated with a culture of Nihilism, with top level management reeking with Lenscap Stupidity, is so rotten internally that it has little chance of surviving. The current top level management does not want to know what's going on, and is incompetent to lead the company anywhere but down. The only thing that can save iWidgets is to bring strong management leadership in from the outside, as IBM brought Gerstner in from RJR Nabisco. Such a leader would have to force accountability at every level, eliminate fraud and contempt for customers, and turn around the Nihilistic / Lencap Gen-X culture, just as Gerstner turned IBM's Boomer stupidity culture around in the mid-1990s. However, I'm not aware that anything like that is being considered for iWidgets.

The generational problem

This Nihilism is not confined to one company or one industry. This is a GENERATIONAL problem, that runs across all companies in all industries.

Individual companies can survive by doing what Gerstner did at IBM in 1994: Throw off the lenscap and make everyone -- Boomers and Xers alike -- totally responsible and accountable for their actions on a continuing basis.

When management at the top simply acquiesces to the Boomer vileness or Gen-X Nihilism, it creates an extremely corrosive corporate culture that can end up destroying the company, unless it's stopped in time. I saw it myself at Dec and iWidgets, and it's been pervasive in companies in the financial area, as illustrated by the fact that venerable companies like Citibank and Merrill Lynch are today close to bankruptcy, and are surviving only because of cash infusions from China, Singapore, Saudi Arabia, and other foreign countries.

There's an unwritten and unstated assumption in law that most people are honest, and that honest people provide a check on dishonest people. So if the local bank tries to swindle people, the bank's customers will complain to authorities or, if the swindle is too sophisticated, then bankers at other institutions will figure it out and complain to authorities.

These assumptions break down during generational Crisis eras, because the dishonesty and Nihilism becomes a generational problem that affects every company. A bank that swindles people won't be reported if all other banks are also swindling people, and if government agencies are closing their eyes to the dishonesty through lenscap dishonesty.

So who's to blame -- Boomers or Xers?

As I said at the beginning, this posting is motivated by some recent messages from web site readers, complaining that I'm blaming Generation-Xers for the faults of Boomers. Let's look at some of those complaints.

Here's the first one:

"I'm disappointed; you normally do better than that. .. [H]ow can you lay the blame of CDOs principally on the laps of Xers, when the Boomers (eg Paulsen at Goldman Sachs) were the generals calling the plays in the war on financial prudence, and the Xers were the field commanders and foot soldiers, and the Silents (Rubin and Greenspan) condoned it?"

Here's another one:

"Did you really pen these words? "But I've since come to the conclusion that the mess that we're in was done on purpose -- by contemptuous and nihilistic Generation-Xers taking advantage of airhead Boomers"

What credibility can you possibly have by writing these obnoxious words? Your generation has bombed everything this country stands for and my generation and my kids generation will be sweeping your dust for many years to come. Shame on you and your arrogance. And yes, I agree with many of your other words but you've degraded yourself by these attacks on a generation that is always trailing behind you cleaning up your mistakes and messes. Now look where we're at.

I chuckled at the use of the word "pen," but let's just go on to the third complaint:

"Typically, I agree with you. But John, I cannot let you generalize and put all the blame on one generation. I am 33 years old. I am an Xer. Let me say that of the Boomers I know, they are holding on to power until the corporations kick them out the door. Most have gone in debt, drive fancy cars, cashed out their home values for equity lines, and stayed behind the desk until they are fat and gray. Honestly, do you think that Xers are now in control? If we (my generation) have done this under the nose of your generation, than I think your generation done a poor job preparing mine for the hand over. I work with a boomer who has told me he is going to retire for 5 years. I asked him why he has not done so.... He told me greed. He said that when you make more than you ever thought possible you just dont leave easily. Everything I do is questioned by boomers less educated and in power. It is so frustrating. My boss is a high school drop out that makes over $150,000 a year. He is so desperate to keep his job. He says, I just need to make it until 65. I feel sorry for the boomers. Most are misled easily and encourage misdealings to stay in power or get ahead. That is how the Boomers will be remembered. That generation really did nothing great and that sticks. No man on the moon or victory over many nations. Just a bunch of pot smoking idiots that have sold our country out to globalization. Bring back nationalism. Time will take care of this issue."

This comment actually says the same thing I'm saying, but highlights the relationship between Boomers and Xers. He says that Boomers "are misled easily and encourage misdealings to stay in power or get ahead." This is a man who makes $150K a year, and is probably in over his head in debt. He encourages misdealings -- presumably by his peers and by his Xer employees -- and he's easily misled -- this being "Lenscap Stupidity," where he may or may not know what's going on, but purposely closes his eyes to it.

So you have a situation where the Xer employee is committing fraud, right under the nose of his Boomer boss, who gives tacit approval, and both the employee and the boss gain financially from the fraud. Now, who's more to blame for the fraud? I would say the Boomer boss is, because he's supposed to know better, and he should stop it before it destroys himself and the company.

Let's take this quote from PIMCO's Bill Gross in a recent monthly column:

"During times of market turmoil it helps to simplify and get basic – explain things to a public and even yourself in terms of what can be easily understood. Goodness knows it’s not a piece of cake for anyone over 40 these days to understand the maze of financial structures that now appear to be unwinding. They were created by youthful financial engineers trained to exploit cheap money and leverage who showed no fear and who have, until the last few weeks, never known the sting of the market’s lash. They are wizards of complexity. I, however, having just turned 63, am a professor of simplicity."

Bill Gross is a Boomer running one of the world's largest bond investment companies. He was running that same company during all the years when "youthful financial engineers" created "the maze of financial structures that now appear to be unwinding."

OK, Mr. Gross, here are my questions: Did you just become a "professor of simplicity" now that things are falling apart, or were you also a "professor of simplicity" when you were making tons of money from this "maze of financial structures"? Did you know what was going on, understanding that it was securities fraud, but allowing it to continue so that you could make money? Or are you saying that you had no idea what was happening? In other words, were you a crook or a moron? Please make your choice -- enquiring minds want to know!

So let's get back to the subject of blame.

In the 1960s-90s, Boomers never did anything but complain, and allowed the older World War II Hero and Silent generations to take care of everything. When those generations retired, Boomers still waited to be taken care of, and Xers took over that role, but with reckless contempt for the rules.

So even though I'm happy to talk about the Lenscap Stupidity of Boomers, their inability to lead, the way they make up facts to suit their political views, and so forth, I am going to say that, in my opinion, Gen-Xers are worse than Boomers because it's Gen-Xers that are actually committing the fraud; but Boomers are more to blame than Xers, because Boomers should be stopping the fraud, rather than benefiting from passive Lenscap Stupidity. Is it a copout to be blaming both generations like that? Maybe, but that's the way I think of it.

In a sense it doesn't matter. Everyone is going to suffer because all the lies, the fraud, the contempt for customers -- it's backfiring now on all of us. We're on the edge of an enormously disastrous worldwide financial crisis that's going to destroy many people, because of Boomer stupidity and Gen-Xer Nihilism.

Returning now to the complaining web site readers quoted above, they express their anger at Boomers, but they make important mistakes when they look ahead to the future, and try to guess how Boomers will be viewed by future historians. My responses to these kinds of comments from Gen-Xer web site readers have been similar, and have all said something like the following:

"I'm sorry that I hurt your feelings, but what you and other Gen-Xers don't understand is that, as bad as Boomers are, Gen-Xers are worse. You think you'll be cleaning up after our mistakes, but you'll actually be making one huge blunder after another. Motivated by fury and anger at Boomers for doing nothing, you'll rush in to "do something", and the things you do will be disastrous -- lead to world war, lead to financial disaster. Your generation's utter contempt for everything that came before you, and your recklessly eager willingness to destroy it, will backfire on you and lead you to desperation and self-destruction. We're already seeing that with the disastrous results of the "financial engineering" that was implemented by Xers under the nose of Boomers. If you even survive the next 10 years, you'll come out of it bitter and angry. And it won't be the Boomers who'll be blamed or remembered for these disasters. You'll be blamed."

This is a time of great desperation for everyone, and it's going to get much, much worse. The way things are going, that's going to happen before too much longer.

I'm also well aware that nothing I've written here will change the Nihilism of any of the Gen-Xers reading it. Whether it's the politicians at, the supervisors at iWidgets, or the financial engineers at Merrill Lynch, these Gen-Xers are committed to this destruction and self-destruction and won't be stopped -- certainly not by their Boomer bosses who don't even want to know what's going on.

As a Greek, an understanding of tragedy is in my bones. Tragedy as an art form was invented in ancient Greece, and three of four great tragic artists of all time were Aeschylus, Sophocles and Euripides of ancient Greece, with the fourth being Shakespeare.

Many people misunderstand the deepest meanings of tragedy. If a child is killed in a random traffic accident, then it's a terrible event but it's not a tragedy in the classical sense, because of that randomness.

The essence of classical tragedy is that the tragic event is not random. The tragic event is inevitable: it MUST occur, and the reason it must occur is because of the nature, the personality, the very CHARACTER of the protagonists. A true tragedy cannot be prevented, even by those who foresee it, because the forces bringing about the tragedy are too powerful for anyone to stop.

Like the child killed in a random traffic accident, the protagonists of a true tragedy have a great future before them, and in the Greek view, perhaps even a heroic future. But the heroic future turns into disaster because the players in the true tragedy move step by step towards that disaster; only a person on the outside, like myself, can see it coming, because these particular players are uniquely capable of inflicting this disaster on one another.

Aeschylus's tragic character Prometheus refuses to submit to fate, just before the universe crashes around him:

"There is no torture and no cunning trick,
There is no force that can compel my speech. ...
So let [Zeus] hurl his blazing thunderbolt,
And with the white wings of snow,
With lightning and with earthquake,
Confound the reeling world.
None of this will bend my will. ...
Seek to persuade the sea wave not to break.
You will persuade me no more easily."

[From The Greek Way by Edith Hamilton]

Prometheus could have been a Generation-Xer.

As the battles between Gen-Xers and Boomers continue, let's all give a thought to the kids in the young Millennial generation. They listen to all this screaming by their elders, and they have ABSOLUTELY NO IDEA what the f--k is going on, but they're still going to bear the brunt of it. (21-Jan-08) Permanent Link
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Subprime mortgage executive kills wife and jumps off bridge to his death

There's a lot more to this story than the papers are telling.

This is a sign of things to come, as the crash comes and people become more desperate.

In his 1940 book, Since Yesterday, Frederick Lewis Allen recounts some jokes that were making the rounds in 1930:

"Did you hear about the fellow who engaged a hotel room and the clerk asked him whether he wanted it for sleeping or jumping?"

"No -- but I heard there were two men who jumped hand-in-hand because they'd held a joint account!"

As the stock market crashes, and the economic situation becomes more desperate, we can expect to see more suicides and murder-suicides.

Here's the story, as it appeared on Saturday morning:

"A senior officer of a failed subprime mortgage company apparently jumped from the Delaware Memorial Bridge yesterday, less than an hour after police discovered his wife dead in their [home]. ...

Buczynski's home, situated along a cul-de-sac dotted with well-spaced homes <font face=Arial size=-2>(Source:</font>
Buczynski's home, situated along a cul-de-sac dotted with well-spaced homes (Source:

Walter Buczynski, 59, was executive vice president of Fieldstone Mortgage Co., which until 2006 was one of the biggest subprime lenders in the nation.

Marcie Buczynski, 37, was found at noon in the bedroom of the couple's home on Atlanta Drive after a man called Evesham police. ...

Twenty minutes later, police received a 911 call reporting that a man had stopped his blue Acura SUV on the bridge and leaped into the icy Delaware River. ...

A motive for the apparent murder-suicide was unclear, Bernardi said. ...

Residents along Atlanta Drive, a cul-de-sac dotted with well-spaced homes, expressed shock on learning both Buczynskis had died.

"They were great, friendly people who invited everybody to their home for wonderful Halloween parties," said a next-door neighbor who asked not to be identified by name. "Their two boys played in my yard all the time."

A former Fieldstone official said Walter Buczynski was devoted to his wife and children, and commuted four hours each day to the company's headquarters near Baltimore so his family would not have to move.

"He was a very sweet man, well regarded in the mortgage world, and an accomplished helicopter pilot, too," said Robert G. Partlow, Fieldstone's former chief financial officer.

Fieldstone once employed more than 1,000 people and made $5.5 billion in adjustable rate mortgage loans. The company collapsed into bankruptcy last year after large numbers of borrowers defaulted, according to the Baltimore Sun. The company laid off most of its workers in August and now has fewer than 20.

On Tuesday, the company filed a petition in bankruptcy court to pay $1 million in bonuses to Buczynski, two other senior officers, and Fieldstone's remaining workers so that the company could wind down its affairs and shutter the business."

Now, I read this story, seemingly about a desperate man facing financial disaster in the subprime mortgage business, and I knew immediately what was going on, and that it had little to do with subprime mortgages.

This was a Boomer man married to a Generation-X woman. In another article I've written, accompanying this one, I describe the fury and hatred that Gen-Xers feel for Boomers in general, and the "Lenscap Stupidity" that Boomers exhibit. That's also true in these kinds of marriages, where nihilistic Gen-X women marry Boomer men with no intention other than to get pregnant, to get as much money as possible, and to get divorced with lucrative child support payments.

The Boomer husbands exhibit "Lenscap Stupidity" by ignoring all the signs, starting with the one that he tells himself, "She may not love me now, but she'll come to love me in time." The clue to this comes from the story: "A former Fieldstone official said Walter Buczynski was devoted to his wife and children, and commuted four hours each day to the company's headquarters near Baltimore so his family would not have to move." It was obvious that this man was in a state of complete denial about and panic over what his wife was obviously planning to do.

It's not only Gen-X/Boomer marriages, though. Here's another story of another murder-suicide that occurred in nearby Pittsburgh on the SAME DAY as Buczynski's:

"State police were investigating a murder-suicide in a small Butler County borough yesterday.

Police said 50-year-old Thomas Raimondi III shot his wife, Deborah Raimondi, 48, before shooting himself in their East Butler home. ...

The Raimondis had been estranged for a short period prior to the incident, according to state police. KDKA-TV reported that Mrs. Raimondi had obtained a protection-from-abuse order against her husband in December.

Here you can see a typical situation: The wife got a "protection from abuse" order against her husband. The order was almost certainly fraudulent. Everybody makes huge amounts of money on these restraining orders. The lawyer representing the wife immediately encourages her to lie and claim abuse, even though there was none, because he makes a couple of thousand dollars from that one act alone -- filing it with the court, the court appearance, and so on. If the husband contests it, he makes thousands more. Phony restraining orders are a hugely lucrative business, and not just for the lawyers.

If you go into a divorce court, you'll see a bunch of people there. Of these people, the only one who actually does productive work is the husband. Nobody else does anything productive. They're all there to get as much of the husband's money as possible. The wife makes false allegations, the wife's lawyer puts on a fictional soap opera drama. The judge knows perfectly well that the wife is lying, but he gets a great deal of money indirectly: Here in Massachusetts, for example, the child support payments go to the DSS, which kicks back a fat portion to the judge's budget, who uses it to dispense favors and demand favors in return. A slew of feminist "professionals" get involved, all demanding fat fees themselves, either from the husband or from the extremely lucrative "violence against women" laws. It's total fraud by the sleaziest and most crooked bunch of people you can imagine, and they've turned the divorce system into a complete sewer. At the top of the sewer is the extremely corrupt Emily's List, by far the wealthiest political organization in the country, which uses its wealth and power to extort favors from politicians at every level. I described all this at length last year in my article on the Duke rape case.

Most men don't have any idea what's going on, and can't believe that they're being charged with things that never occurred. For many men, the reaction is to commit suicide, and quite honestly I think they're better off that way, if they choose to do it. But people who commit suicide should not harm other people in doing so.

But unfortunately some men become extremely depressed and are driven to sociopathy by the court system, and they kill their wives first, out of vengeance. Some go even further and kill their children, reasoning that they're better off dead than growing up knowing that their father killed their mother and then killed himself. This is really evil stuff, and I attribute it directly to feminist policies since the 1970s.

And so, getting back to Buczynski, when I read that story on Saturday morning, I immediately knew exactly what had happened. Gen-Xer Marcie had never really liked Buczynski, but stayed with him while he was making so much money. When it was clear that she could make more money by divorcing him, she undoubtedly told him she was going to divorce him, and unless he left their home immediately, she was going to charge him with domestic violence. That may not be the exact sequence of events, but you can be certain that those kinds of events were all part of it.

And so, I wasn't surprised the least little bit, when another news story came out, late on Saturday evening:

"Personal problems led an executive of a collapsed subprime mortgage lender to kill his wife inside their home and then jump to his death from a bridge, authorities said Saturday.

Walter Buczynski, 59, left a note inside his car, indicating that his wife would be found at their home, that he had jumped off the bridge and that the couple's two sons were safe, prosecutors said.

Prosecutor Robert Bernardi said the note also revealed that the motive for the slaying was "based upon the personal relationship of the couple," not the family's economic situation. Bernardi declined further comment."

I hope the prosecutor wasn't surprised by this turn of events, because I sure wasn't. Incidentally, a news story appearing on Sunday said that he killed her by bashing her head in, and that they hadn't yet found his body in the icy waters of the Delaware.

But this is all typical stuff that I've seen many times in my research on gender issues.

Let's now turn to the REAL irony of this story, and repeat one paragraph from the story above:

"On Tuesday, the company filed a petition in bankruptcy court to pay $1 million in bonuses to Buczynski, two other senior officers, and Fieldstone's remaining workers so that the company could wind down its affairs and shutter the business."

Can you believe this? As cynical as I am about almost everything, this paragraph just makes me shake my head in utter astonishment.

If this company, Fieldstone Mortgage Co., was a typical subprime mortgage broker, then they had made huge sums of money by defrauding thousands of people by talking them into lying on their mortgage applications, and had defrauded the lenders through these falsehoods. The company is now going bankrupt, as they deserve.

So what's happening to the left over money? Is it going to the defrauded homeowners? Is it going to the defrauded lenders or investors?

No. It's going into the pockets of the perpetrators, including Buczynski, in the form of bonuses!!!! Incredible!!!!

And so, the murder-suicide really was not motivated by financial desperation. Marcie must have figured out that the gravy train was over, and she should get as much of that year-end bonus as she could, by divorcing and lying about violence. And Buczynski, who had lost his job and his source of income, and might possibly even have felt a little remorse over the large number of people that he had screwed, was now faced with losing his wife, his kids, his home, and every penny he had saved. Furthermore, he would be ordered by a crooked divorce judge to make child support payments that would probably exceed any income he could possible hope to make, leaving him literally with less than nothing.

You know what happened next. (21-Jan-08) Permanent Link
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WSJ talks about stock market "panic" as earnings plummet again

Will there be a "volatility explosion" on Tuesday?

According to an article in Saturday's Wall Street Journal, "Students of [economics history] will recognize where we now are in the current credit crisis: the panic stage."

The article provides an explanation for how we got here: "the U.S. economy built up an enormous credit bubble that has now popped." It blames this on the Federal Reserve, and gives a series of airhead reasons that don't even make sense since, at the very least, they don't account for the dot-com bubble. It continues:

"Enter the panic stage. The desire for debt has turned into a stampede to quality, especially Treasury bills. The same folks who never predicted the economy would recover in 2003 are now cheerleading recession. Any bank writedown or deal to raise capital -- no matter that it is part of the healing process -- is taken as a sign that there is more bad news to come.

Meanwhile, the politicians plot to "stimulate" the economy by dropping dollars from the Capitol dome. We are also told the Fed funds rate must chase the 90-day T-bill rate down to the levels it reached when we had negative real interest rates -- never mind the anemic dollar and soaring commodity prices. The danger now is that this panic becomes a self-fulfilling prophesy and talks us into a crash.

There are two ways in which a crash could happen. The first is insolvency of one or more financial institutions that triggers a systemic failure. The second is a loss of global confidence in U.S. financial management and the dollar. Neither has to happen.

His solution: "So what to do? Pass a tax cut that is immediate, marginal and permanent." I can't for the life of me figure out how this could possibly keep the credit bubble from continuing to burst, but that's what you get in these airhead WSJ articles.

From the point of view of Generational Dynamics, what's most interesting about this article is that the level of anxiety and panic among investors is getting so great that even the Wall Street Journal is talking about panic.

I would add that CNBC anchors apparently feel the same way. Normally they're bright, perky and cheery, but towards the end of last week they could barely crack a smile. Maria Bartiromo said she was exhausted, and Bob Pisani looked like he hadn't slept in a week.

This indicates that the high level of anxiety that began to increase early last year and really accelerated with the August "credit crunch" could well be near a critical stage.

There's very good reason for this. Not only have corporate earnings continued to fall, the rate of fall is accelerating.

Here's the summary from Friday from CNBC Earnings Central:

"As of Friday, January 18th:

63 companies in the S&P 500 have reported earnings for Q4, 49.21% have beaten estimates, 15.87% were in-line, and 34.92% have missed. (Data provided by Reuters Estimates)The blended earnings growth rate for the S&P 500 in fourth-quarter 2007, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -19% down from -11.3% the previous week, attributed in part to both Citigroup and Merrill Lynch reporting earnings below estimates.

At the start of the quarter, the growth rate for Q4 was 11.5%. (Data provided by Thomson Financial)

Note that only 63 companies have reported 4Q earnings so far. There'll be hundreds of earnings figures coming in next week, so we'll get a better idea of whether the estimates are high or low.

We can now update the table of the changes in fourth-quarter earnings estimates since the beginning of the fourth quarter, as follows:

  Date    4Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct  1:             +11.5%
  Dec  7:              -1.3%
  Dec 14:              -3.8%
  Dec 31:              -6.1%
  Jan  4:              -9.5%
  Jan 11:             -11.3%
  Jan 18:             -19.0%

It's hard to believe, but these estimates are not only falling significantly again, but the rate of fall is accelerating faster and faster.

A few months ago, there were still people calling me crazy for predicting that we were close to a generational stock market panic and crash (like 1929), but I honestly doubt that there are too many regular readers of this web site who still think so.

Ever since January 1, the stock market has generally followed the 1929 pattern that just preceded the crash, and everyone reading this web site has to at least consider the possibility that the dam is going to break next week, or soon after that.

Interestingly enough, there's one thing that happened in 1929 just before the crash that I haven't seen yet: If you look at my Dow Jones historical page, you'll see that on Monday, October 7, 1929 (1929-10-07), the market went up 6.32% on that one day alone. This must have created an enormous amount of euphoria, and may have been an important psychological component leading up to the crash two weeks later.

So, there may yet be a big upward spike in the market just preceding any crash that occurs. What I don't know is whether that HAS to happen. I suspect not, because there have already been several euphoria/anxiety cycles in the last three months, and there may be no further need for a euphoria trigger.

So look, if you're a regular reader of this web site, then I strongly suggest that you get out of the stock market, get out of any kind of funds except cash and US Treasuries. If you get a CD in a bank, make sure that it's FDIC insured. I suggest that you do it on Tuesday morning; don't even wait until the afternoon.

I have one more piece of information.

According to one CNBC analyst, there's going to be a "volatility explosion" on Tuesday. Here's what Pete Najarian, co-founder of, said late Friday afternoon:

"January was what we call a "leap option." That means it's been around for a very, very long time. It expired today. We're no longer there. Those options have monster open interest. That's where the protection was. The puts on the down side, whether you're looking at the S&P, the quad Q -- go across the board -- there was monstrous protection in place. That no longer exists, starting now. They did not come in and buy it today, not enough, so the protection's not there. That's why we are set up for the perfect storm of any negative news -- I'm not saying it's gonna happen on Tuesday. But - the setup is there because there is not protection in place. When people have to scramble, they wanna protect a position, they're gonna have to run, and that's gonna send things down even faster and sharper. Volatility should scream on that."

I'm not entirely certain what all this means, but here's what I understand:

A LEAP (Long-term Equity Anticipation) option is an option to buy or sell stock at a fixed price prior to the expiration date. What makes LEAP options different from ordinary options is that the expiration date is far in the future, say 2-3 years.

The phrase "open interest" refers to the number of open options and futures contracts.

Now, I think what Najarian is saying is that a number of LEAP options expired on Friday. They would have been protected by investors hedging with short-term options and futures contracts, and there were a lot of those. These provided "protection," because the large numbers of these served to buffer falling stock prices.

On Tuesday, all of that protection will be gone, and if there's any bad news, then the market may fall sharply without that protection.

I don't know Najarian well enough, nor do I understand what he's saying well enough, to form an opinion about whether he's right about a "volatility explosion" on Tuesday. However, the other panelists agreed with him, for what it's worth.

However, whether he's right or not, the markets have been trending sharply down since January 1, and with the extraordinary collapse of corporate earnings, there's at least reason to be very, very cautious. (21-Jan-08) Permanent Link
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As economy sinks, Congress rushes to pass a fiscal stimulus package.

We're seeing the first signs of "regeneracy" of civic unity.

This is something I've discussed on this web site a number of times, but now we're beginning to see it actually happen, at least on this one issue.

As America entered a generational Crisis era in the last few years, Washington has become increasingly unable to govern. What passes for debate in Congress has been incessant bickering, misstatements of fact, truly moronic political speeches, and out and out lies by politicians who act like nothing so much as clowns.

Now these politicians are beginning to feel a level of anxiety and panic, as it becomes clearer and clearer that the economy is headed for a tailspin. This has caused a big change in attitudes and behaviors of large masses of voters and politicians that what is needed is a "fiscal stimulus package" -- a law or set of laws that will provide direct federal government payments to whoever the lawmakers want.

From an economic point of view, this differs from what the Fed does in the way the money is provided. The Fed has a very rough tool -- controlling interest rates, and allowing banks to borrow money. That's called "monetary" policy. But what Congress is now doing is called "fiscal" policy. Congress passes a law that says: Hand out money to whomever we say.

Of course there isn't total unanimity. The Republicans would prefer to provide money through a tax rebate. The Democrats would like to target the money through food stamps and unemployment benefits. But there is wide agreement that something of this sort must be done, and must be done quickly.

On Friday's PBS NewsHour with Jim Lehrer, one subject of discussion was the shock that everyone felt that there was so much unanimity.

Senator Chuck Shumer <font face=Arial size=-2>(Source: PBS)</font>
Senator Chuck Shumer (Source: PBS)

First, a sound byte and video from Senate Democrat Chuck Shumer, chairmon of the joint economic committee:

"I'm gratified. I have seen an unusual amount of desire to cooperate on this issue, on both sides of the aisle, and on both ends of Pennsylvania Avenue. So I think there's an understand of urgency. And if you talk to Chairman Bernanke, speed is of the essence. If we're to twiddle our thumbs and wait till May or June, it may be too late. I think if we avoid any of the ideological fights, we could actually pass something so that it would take effect by March 1."

Then, in the studio discussion that followed, Jim Lehrer asked, "By March 1, there could be a consensus economic stimulus package in law?" Pundit Mark Shields, syndicated columnist, responded thus:

"I really think there could, Jim. This is not political posing. What Chuck Shumer said is true. Talking to Democrats, they've rarely seen in the entire Bush administration the level of willingness to cooperate, the openness on both the part of Roy Blount in the House, and John Boehner as well as Chairman Bernanke and Secretary Paulson, and the White House itself. I think their attention is concentrated by the fact that their could be a political hanging if the economy does go south. So I think there's some self-interest in this, but it is a remarkable level of cooperation."

Pundit Mark Shields <font face=Arial size=-2>(Source: PBS)</font>
Pundit Mark Shields (Source: PBS)

Actually, this isn't the first time we've seen these levels of cooperation in the last few years. After the 9/11 attacks, there was broad consensus on the war in Afghanistan. Then, throughout the discussions during 2002, there was almost equally broad consensus and overwhelming support to begin the ground war in Iraq. The consensus on the Iraq war has faded, of course, but it was extremely prominent in 2002 and early 2003.

From the point of view of Generational Dynamics, we're seeing the first signs of the "regeneracy." This word is used in generational theory to refer to a time the political bickering stops, and the country unifies around its leader. It's called the "regeneracy" because it's the time in the generational cycle when national and societal unity is regenerated, and the country is unified once more.

This will not be the last event that will serve as a catalyst for a regeneracy. There are, unfortunately, much greater shocks yet to come -- a major stock market crash, and some kind of military disaster, perhaps a terrorist event on American soil or a military disaster overseas. These catalysts will completely move the country toward a unified goal of survival, and preservation of the American way of life, and we will be led into the Clash of Civilizations world war. (19-Jan-08) Permanent Link
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The collapse of the bond insurers, ACA, Ambac and MBIA

In a rant Thursday on CNBC, Jim Cramer accuses them of securities fraud.

One of the tricks that financial engineers used to get AAA ratings for mortgage-backed securities that would otherwise be low-rated was to "insure" them with bond insurance agencies. Thus, a low-rated security was "doubly protected" -- either the security would pay off or the insurance would pay off. If the insurance agency itself had an AAA rating, then any securities it insured would also have AAA ratings.

As I mentioned last week, it's a simmering problem is that these bond insurers are themselves vulnerable to the subprime mortgage problem. It's been an incredible setup from the beginning:

So everyone was fat and happy, as long as the housing bubble was growing. When it started leaking, everyone was in trouble, because the models set up by the investment firms, the bond insurers, and the ratings agencies assumed that the housing bubble would continue forever.

One of the bond insurers, ACA Capital Holdings, lost its AAA rating in December. On Thursday, Merrill Lynch said it would write off any securities with insurance by ACA because it's worthless.

The two largest bond insurers, MBIA Inc and Ambac Financial Group, have been put on notice by the ratings agencies that they may lose their AAA ratings as well.

But for some extremely strange, odd reason, the ratings agencies keep putting off the action. It always seems to be a few weeks away.

On CNBC on Thursday Jim Cramer went into one of his shouting rants, focusing on the ratings agencies.

Long time readers of this web site will recall that I've quoted several of Jim Cramer's rants.

In fact, I had completely forgotten one of his rants myself. It occurred last February, at the time when it was first becoming apparent that many people were defaulting on their mortgages and losing their homes. Here's what Cramer said:

"I wish the bears understood how important subprime lending is to my thesis about the market going higher. But then again, if they did, they would be forced to cover everything.

For as long as I have been at this game, it has taken a crisis for the Federal Reserve to move. The Fed is always reluctant to move because it needs the crisis as a cover so it doesn't look like it's soft on inflation. ...

When you have the housing industry building a fraction of the homes it was building and credit hard to come by, you are giving Benanke the crisis cover he needs.

Some of my friends who read RealMoney are freaking out about the negative columns that are being written about how dangerous this subprime crisis is. I'm taking those columns very seriously, which is why I am growing more bullish by the day. The fact that the Fed chairman bought into it today in front of the House of Representatives shows me that the Congressional drumbeat -- remember, prime is Republican, subprime is Democrat -- could be building and building fast. ...

If anything, they're saying there might be a fire. I say it's raging, which is why I believe the crisis is about to give us that May cut that I am counting on to take the Dow up 17% this year."

Isn't this hilarious? Somebody ought to remind him about this on their air.

On August 1, I quoted Cramer's rant where he advised people to walk away from their homes if you can't keep up with the payments. He advised paying off your credit cards before paying off your mortgage, because you can live with your relatives, but you'll need credit cards to buy groceries.

It was on August 5 that Cramer became completely hysterical, blaming Ben Bernanke because people are losing their homes. In February, the housing crisis was good news because the Fed would have to lower interest rates, and the stock market bubble would continue increasing. By August, he was screaming that his plan wasn't working, because Bernanke refused to cooperate. Of course, the Fed has lowered the interest rate several times since then, but it no longer has any effect.

Here are some excerpts from Thursday's rant from Cramer:

"We keep hearing that there are two kinds of mortgages -- the AAA rated -- those are OK -- and the subprime. [But] we keep seeing that these distinctions are meaningless.

First of all, [even the high-rated mortgages are] based on insurance -- I don't think any of these bond insurers can pay off - they don't have the money. ...

The great fiction continues. These are all novels. All the earnings you're seeing from companies that need capital are written by Somerset Maugham or Mark Twain or Hemingway, Faulkner. They're all ghost written. It's all fiction.

[Question: What's the end game]

[The end game will occur] when the monoline insurers [another name for bond insurers] all admit that they can't pay, and AAA [rating] all goes away, then we see what these [financial] institutions look like. The good news is this -- it's bifurcated -- we now have banks that don't need capital -- JP Morgan, Wells Fargo, USB -- and we have banks that don't know what they're doing.

[Question: Merrill Lynch wrote down those assets to 34 cents on the dollar, not as aggressive as what you saw from Morgan Stanley. Is that enough?]]

That's nowhere near enough. They 've written down the bad parts. They don't realize the good parts are bad too.

There's just too much fiction involved here. Anybody who's being backed up by Ambac or MBIA -- Look, we used to think that there would be insurers we would have that would not pay for our auto if our auto had a collision, or maybe they wouldn't pay for fire if our house burned down.

Well, HELLO. These people are all banking on this insurance as if it's Allstate, as if it's Met Life. These are not Allstate and Met Life.

[Question: How come Ambac still has an AAA rating? How come ratings agencies haven't moved on any of these guys yet?]

Because the truth is too painful.

[[Note: On January 16, Ambac announced that its own credit derivative portfolio had to be written down, for a loss of $5.4 billion, or an enormous $32.83 per share. This is where Cramer in essence charges Ambac with securities fraud, and the SEC with negligence.]]

How can you take a $32 a share charge, and not have the Justice Department in there tomorrow? Where the heck is the SEC? Where the heck is the FTC? What are they doing? ...

[Screaming] Where's the SEC? How can you take a $32 a share charge and not have any disclosure about it beforehand? How can we have these levels of fiction in financials after Sarbanes-Oxley? How do people get away with this? How do they live with themselves? ...

Anybody who says they're triple A rated backed up by insurance -- that's a drama -- that's one of those dramas that's getting canceled on the other bad networks.

There's only one triple-A -- the guys who come and change your tire when you break down on the highway - those guys are reliable. The ratings agencies are just works of fiction -- Moody's is fiction, S&P is fiction, and the people who read the fiction are the boards of directors of MBIA.

[Question: Who's going to call them out on the carpet besides you?]

No one. It's too dangerous. I shouldn't do it. It's just going to make my life miserable. But I don't care.

[Question: I've heard people whispering about it. They aren't talking about it on the air.]

Let me tell you why people whisper. Because they play golf at the same country clubs as each other, and don't want to hurt each other. I don't play golf with anyone, and maybe that's why I tell the truth. Or maybe cause I'm completely nuts. ...

[Question from Rick: Do you remember a couple of years ago when the Fed behind the screens was scrambling because the sales people were selling the derivatives using paperwork on the back of cocktail napkins? They said that some of these derivatives' paperwork in the back office was nine months behind. They let that go on. There were so many red flags.]

Greenspan loved that. That was financial engineering. He applauded it. So did our pal Ben Bernanke. They loved it. They just didn't understand it. I sold that product. I put some of that product together at Goldman Sachs. We would sit there and say, hey, what happens under this and that. I don't know. But boy, the commission's so huge, let's jam it. The commish on structured product [like CDOs] is gigantic. I could make a fortune ... The guy who actually understood this, better than anybody, was in the book Appointment in Samarra [a 1934 novel by John O'Hara]. That is a book about this era, because he's about not telling the truth because of the other people at the country club. ...

We used to regulate people, but we decided that was bad and we don't regulate people any more.

The commission on a structured product is so gigantic. First of all, the customer has no idea what it really is because it's embedded.

Second the customer's really stupid. That's what you always do. You used to joke, you'd get off the desk and say, "The customer's really stupid. The German bank - they are BOZOs. Throw them anything. The Australians? MOW-rons." And then you look at the state. "Florida? The Florida fund? They're so stupid, let's give them triple-B."

And that's what they'd do. They'd laugh, and they'd laugh at the customer, and they'd jam them with the commission, and that's what happens. ...

But remember, this is about commissions, it's about how much money you can make by jamming stupid customers. I've seen it all my life. There are stupid customers, and you jam them.

Cramer makes specific accusations of a number of players in the structured investment business of the last few years. He particularly accuses Ambac of securities fraud for failing to provide early warning of a $32 per share charge.

This is the kind of fraud that I've analyzed at length in the past. It occurred because the generations of people who survived the Great Depression are all gone, because Boomers are incapable of leading, and because Generation-Xers are enraged at and contemptuous of everything that came before them.

Basically, the X-ers committed fraud at will, and the Boomers simply let them do it.

Now we're seeing how these actions are backfiring against the X-ers who perpetrated them and the Boomers who ignored them.

On Thursday, stock shares in Ambac and MBIA lost about 50% of their value. These two companies may well be close to complete collapse.

The stock market as a whole fell 2-3%, and this is being repeated in Europe and Asia. The Dow Industrials are down 15% from their Oct 7 high, as you can see from the bottom of my Dow Jones historical page, to 85% of their high value.

The 1929 pattern has been continuing on a daily basis since January 1.

There's no way to predict exactly when a generational panic and crash will occur (as it did in 1929), but the signs indicate that it's getting close. (18-Jan-08) Permanent Link
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Violence continues in Gaza as Israel kills 18 to stop rocket attacks

President Bush's new Mideast peace initiative has a zero chance of success.

At least 18 people are dead and 50 wounded, resulting from an incursion of Israeli forces into Gaza on Tuesday, in an attempt to destroy a house used to fire rockets at southern Israel.

Senior Hamas leader Mahmoud Zahar, right, looks at the body of his son Hussam, 24, at the morgue <font face=Arial size=-2>(Source:</font>
Senior Hamas leader Mahmoud Zahar, right, looks at the body of his son Hussam, 24, at the morgue (Source:

One of those killed in the exchange of gunfire was the younger son of Hamas leader Mahmoud Zahar, whose oldest son was killed several years ago by Israeli troops. Hamas responded with a heavy barrage of missiles fired at Israeli cities, injuring a mother and two small children. On Wednesday, there was more violence.

This is the bloodiest violence in Gaza since the fighting last June between the two Palestinian factions, Fatah and Hamas. But except for the degree of the fighting, for Gaza it's really a typical day: Gaza rockets strike Israel, Israeli forces strike Hamas, Fatah and Hamas strike each other.

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The first major international prediction that I posted on this web site was on May 1, 2003, just as President Bush was advocating the new "Mideast Roadmap to Peace" that called for a Palestinian state alongside Israel: "Will Mideast roadmap bring peace?" In that article I wrote the following:

"The Mideast is currently replaying the Jewish / Palestinian wars of 1936 to 1949. Why? Because the generation of people who fought in those wars have been retiring or dying.

The new "Mideast Peace Roadmap" calls for a Palestinian state by 2005, side by side with Israel. It provides a series of steps for both sides to follow, mostly having to do with eliminating violence against both Palestinian and Israeli civilians. The plan was sponsored by the United States, Russia, the European Union, and the United Nations.

Unfortunately, the fault lines in the Mideast have never been resolved, and Generational Dynamics predicts that they can be resolved only by another crisis war. In fact, recent polling has shown the rise of a new "Young Guard" generation of militant Palestinians that will accept nothing less than the elimination of Israel.

The last crisis war in the Mideast occurred from 1936 to 1949. That war was indirectly caused by Nazi persecution of Jews in Europe. Because of Nazi persecution, European Jews flooded into Palestine in the 1930s. Hostilities between the Palestinians and the Jews began in 1936, and reached a climax in a major war in 1948-49 following the partitioning of Palestine and the creation of the state of Israel. The partitioning of Palestine has never been accepted by the Palestinians.

Throughout history, one can point to probably thousands of similar situations, where an artificial boundary is imposed between two peoples, and one or both sides oppose the boundary. Of those thousands of examples, you will probably find few or none that are resolved peacefully.

Generational Dynamics predicts that in such fault line situations, a new crisis war begins when the generation of kids that grew up during the last crisis war all retire or die, at approximately the same time. Growing up during a violent, bloody war turns them into risk-averse adults who guide society throughout their lifetimes, always looking for ways to compromise and contain problems. When they all retire or die, the society loses their collective wisdom, as the generation that grew up after the last crisis war takes charge of society. In the Mideast situation, this is happening today among both the Palestinians and the Israelis.

We are now in the early stages of replaying the extremely violent, bloody wars between the Jews and the Palestinians that took place between them from 1936 to 1949. So far the war has been little more than a series of skirmishes, as it was in the late 1930s. The full-fledged violent, bloody war is awaiting a generational change.

There's an incredible irony going on in the Mideast today, in that the leaders of two opposing sides are, respectively, Ariel Sharon and Yassir Arafat.

These two men hate each other, but they're the ones cooperating with each other (consciously or not) to prevent a major Mideast conflagration. Both of them remember the wars of the 1940s, and neither of them wants to see anything like that happen again. And it won't happen again, as long as both of these men are in charge.

The disappearance of these two men will be part of an overall generational change in the Mideast that will lead to a major conflagration within a few years. It's possible that the disappearance of Arafat alone will trigger a war, just as the election of Lincoln ignited the American Civil War. (It's currently American policy to get rid of Arafat. My response is this: Be careful what you wish for.)

Generational Dynamics predicts that a major new violent, bloody Mideast war must occur, sometime in the next ten years, depending upon when the generational change takes place. There are signs that the generational change is occurring now, and this means that the next bloody, violent Mideast crisis war will take place within 3 or 4 years. There is no "Mideast Peace Roadmap" that has any chance of stopping that."

Nobody else was saying anything like this in 2003, and I was called "crazy" by several people for suggesting it, especially my characterizations of Arafat and Sharon. And yet, except for the overly precise timing in the last paragraph, this is exactly what has happened since then.

When Yasser Arafat died in November 2004, everyone breathed a sigh of relief, because the terrorist leader, the only person preventing the adoption of the Roadmap to Peace, had died. With him gone, the two-state solution could move forward, finally.

The euphoria was reinforced in January 2005, when Mahmoud Abbas (Abu Mazen) took bold steps to advance the peace process, including the deployment of Palestinian Authority forces throughout Gaza to stop further attacks on Israel.

Israel and Ariel Sharon did their part by withdrawing from Gaza all Israeli settlements and forces. It was felt that this would bring a new era of peace and stability to Gaza.

However, Mahmoud Abbas immediately started losing control of Gaza, thanks to the increased popularity of Hamas, considered to be a terrorist group by the West.

The hope that the Israeli withdrawal would lead to peace were quickly dashed. By September, it was clear that, with the Israelis gone, Gaza was becoming increasingly violent and unstable.

Nobody had any idea what was going on, except those who read this web site. The only way to understand what's going on in Gaza is through a generational explanation -- and as I've said many times, generational explanations appear to be too abstract for these politicians, journalists, analysts and pundits to understand, because they can't seem to grasp even the simplest and most obvious of them.

It's very easy to understand what's going on in Gaza if you simply start from the fact that the Gaza strip is densely populated and the median age in the Gaza strip is 16 years old. Thus, the Gaza strip is run by a generation of children with guns and missiles and with almost no adult supervision.

To these children in the "Young Guard," Mahmoud Abbas and the "Old Guard" are antideluvian relics with no relevance. Hamas' leaders are two generations younger, but even they're too old for many of the Palestinian children running Gaza.

In December 2005, Hamas started winning municipal elections, ahead of the Fatah group headed by Abbas. The entire Mideast peace process was thrown into turmoil in January, 2006, when Hamas won control of the Palestinian parliament in free elections.

Meanwhile, Gaza violence continued to surge, so that former CIA director James Woolsey said that the Gaza pullout had the worst possible results:

"The approach Israel is preparing to take in the West Bank was tried in Gaza and has failed utterly. The Israeli withdrawal of last year has produced the worst set of results imaginable: a heavy presence by al Qaeda, Hezbollah and even some Iranian Revolutionary Guard units; street fighting between Hamas and Fatah, and now Hamas assassination attempts against Fatah's intelligence chief and Jordan's ambassador; rocket and mortar attacks against nearby towns inside Israel; and a perceived vindication for Hamas, which took credit for the withdrawal. This latter almost certainly contributed substantially to Hamas's victory in the Palestinian elections."

Another blow to the peace process came in May, 2006, when Mideast envoy James Wolfensohn quit in disgust. Wolfensohn had been appointed by the "Quartet" of nations (the U.S., European Union, United Nations and Russia) that put forth the Mideast Roadmap to Peace in 2003 to aid the Jews and Palestinians in their negotiations. He did his best. He helped negotiate several agreements, and as former President of the World Bank, he used his formidable list of contacts to get investors to purchase dozens of greenhouses left behind by Israeli settlers, so that Palestinians could use them right away to get hard currency by growing food for exports.

Here's how one columnist described the situation:

"But Wolfensohn is leaving in apparent disgust with the Israelis, the Palestinians, and the international community, regarding the entire effort to isolate the Hamas government a punishment of the Palestinians, which will only lead to more despair and intransigence on the Palestinian side. Ever the diplomat, he is not stating outright how disgusted he is, but he has made clear that he is furious about broken Israeli promises to take steps to ease conditions for the Palestinians, particularly Gazans, where half the population is now living beneath the World Bank's own measure of poverty -- less than $2 a day. He's no less frustrated by the Palestinians, particularly their inability to rein in the lawlessness that took over in Gaza. Indeed, while some of the greenhouses he purchased were successfully handed over to Palestinians (who are going bankrupt because of Israeli security restrictions that make agricultural exports out of Gaza extremely slow and difficult) others were ruined by in fighting by rival gangs that nobody in Gaza can control. As for the international community, which 'hired' him as an expert in economic development, he is disgusted with its inability to intervene with anything other than isolation of the Hamas government."

Summer 2006 saw Israel's Lebanon war against Hizbollah. The Palestinians didn't participate in the war, but the level of violence in Gaza continued as before.

One of the few studies of the attitudes of young Gazans was done in December 2006, and it highlighted how young Gazans want war with Israel, or at least do not fear it.

For years, until the "surge" started working in mid-2007, the world has been so obsessed with Iraq that the Israeli/Palestinian situation was completely ignored. I complained about that many times on this web site.

There were a few exceptions. In September 2006, Tony Blair committed to solving the Mideast problem. In November, 2006, Jordan's King Abdullah, warned of a potential explosion in Palestine. He repeated his warnings to a joint session of Congress in March, but was treated with scorn by moronic journalists, analysts and politicians, almost all of whom have no idea what's going on in the world.

A civil war between Fatah and Hamas had been building for a number of months and, finally, in June of last year, Hamas defeated Fatah in Gaza, taking control of the entire Gaza strip.

Now, with the Iraq situation settling down, President Bush is committing to solve the Palestinian issue before he leaves office a year from now. I guess politicians have to do stuff like this, even though there isn't a snowflake's chance in hell of succeeding.

When I posted my original predictions on the Mideast on May 1, 2003, I had no way of knowing what was going to happen, and yet everything I predicted is trending true, especially the increasing chaos in the Mideast. I said that a "Young Guard" would arise and would make sure that no peace plan would ever be accepted. As time has passed, that prediction has only trended more and more true.

Since 2003 I've posted almost 900 articles on this web site, most containing specific predictions on subjects related to Darfur, Iraq, Pakistan, Sri Lanka, China, Japan, national and word finances, and so forth. The predictions have been based on Generational Dynamics theory. I've posted trend predictions, which are 100% certain within a (sometimes lengthy) indefinite window of time, and probabilistic predictions, which are usually 70-90% certain within a window of several months.

To date, ALL of the trend predictions are either true or are clearly trending true, and almost all of the probabilistic predictions have come true. None have been proven wrong. This last point is important, because it's easy to get a million predictions right -- just make two million predictions. I've succeeded in getting many predictions right with no predictions wrong.

For years I've been challenging everyone to find a journalist, analyst, pundit, politician or web site with a predictive record that comes anywhere close to the predictive success of this web site, and none has been found. Superstars like Paul Krugman are frequently wrong, but this web site is not.

So what's going to happen in the Mideast in the next year?

Among the Palestinians themselves, there is an enormous and increasing attraction to having a war with the Israelis. However, I've mentioned many times that I haven't seen the signs that it's near -- and by this I mean the kind of language that Israelis and Palestinians say about each other. You never hear mainstream Israelis say, "Those Palestinians are vermin"; they say, "Those Palestinians have to stop militants from sending rockets and missiles into Israeli territory." And you don't hear mainstream Palestinians say, "Those Israelis are disgusting worms"; they say, "Israelis have the end the apartheid that prevents Palestinians from traveling."

In other words, the Palestinians and Israelis still make only behavioral criticisms of one another, rather than hateful personal vilifications. The latter is absolutely essential, because without these personal vilifications, a war leader cannot motivate his people to make the sacrifices necessary to have a genocidal war. In fact, Fatah and Hamas factions have used hate-filled personal vilifications with each other more than with the Israelis.

This could change any day, however, and be triggered by some chaotic event (in the sense of Chaos Theory), an event that cannot be predicted. It might come about because some Israeli action suddenly infuriates the Palestinians. Or it might come about because of interference by Iran or by Egyptian militants in the Muslim Brotherhood.

But the original prediction from May 1, 2003, has not changed. The Palestinian situation has been continually deteriorating into chaos ever since Yasser Arafat died, and will continue to do so. In fact, it's hard to find a day in the last three years where the situation hasn't been worse than the preceding day. (17-Jan-08) Permanent Link
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Citibank's huge loss and sharply lower retail sales roil stock market

Investors are being hit by a double-whammy today, starting with a Citigroup press release announcing fourth quarter earnings:

"Citi Reports Fourth Quarter Net Loss of $9.83 Billion, Loss Per Share of $1.99

Citigroup earnings, 1999-2007 <font face=Arial size=-2>(Source:</font>
Citigroup earnings, 1999-2007 (Source:

Results Reflect Write-Downs on Sub-Prime Related Direct Exposures in Fixed Income Markets and Increased Credit Costs Related to U.S. Consumer Loans

New York, NY, January 15, 2008 – Citigroup Inc. (NYSE:C) today reported a net loss for the 2007 fourth quarter of $9.83 billion, or $1.99 per share. Results include $18.1 billion in pre-tax write-downs and credit costs on sub-prime related direct exposures in fixed income markets, and a $4.1 billion increase in credit costs in U.S. consumer primarily related to higher current and estimated losses on consumer loans.

For the full year 2007, net income was $3.62 billion, or $0.72 per share. See Schedule A for full year business segment results.

Management Comment: "Our financial results this quarter are clearly unacceptable. Our poor performance was driven primarily by two factors – significant write-downs and losses on our sub-prime direct exposures in fixed income markets, and a large increase in credit costs in our U.S. consumer loan portfolio. Looking beyond these two factors, revenues and volumes continued to grow strongly in a number of our franchises and we generated record results in international consumer, transaction services, wealth management, and advisory," said Vikram Pandit, Chief Executive Officer of Citi."

The surprises were as follows:

The fantasy hope had been that Citibank and other financial institutions would have a few more writedowns of bad mortgage-backed assets, and then it would be all over, and the bubble could start expanding again. The Citibank report made that fantasy unlikely, even to investors.

That was followed by news that retail sales fell sharply in December, by 0.4%. Most retail companies make most of each year's profit during the December holiday season, and a fall in retail sales will have a severe impact on earnings.

Growth of delinquent consumer loans <font face=Arial size=-2>(Source:</font>
Growth of delinquent consumer loans (Source:

These two reports -- the Citibank and retail sales reports -- were linked to a Monday NY Times report that also finds sharp falls in retail sales, but relates it to surges in delinquent and defaulting consumer loans -- credit cards, auto loans and mortgages.

The surging delinquencies indicate that the cutbacks in retail spending are not temporary, but are going to continue for a while.

Citibank's announcement this morning that it lost $4.1 billion on consumer credit really resonated with the other news.

Wall Street opened sharply lower this morning. As of 1 pm, the Dow Industrials have remained down about 180-200 points, after trending downwards since the new year.

It's clear that journalists, analysts, pundits and financial managers have absolutely no idea what's going on. The "bulls" are saying that growth will slow down, but there'll be no recession, and the economy will really take off in the last half of the year; the "bears" are saying that there'll be a mild recession, and the economy will really take off in the last half of the year.

One thing that's particularly striking is that the stock markets are not reacting to the current liberal Fed policies, as implemented in the Fed's "Term Auction Facility" (TAF) announced last month.

The interest rates that triggered the "credit crunch" last year have returned to normal, thanks to the large amounts of liquidity that central banks, including the Fed, the European Central Bank, and the Bank of England, have injected into the financial system through these auctions. Unlike Fed funds rate adjustments and open market operations, which are "general purpose" interest adjustments, the auctions provide liquidity to banks for the specific purpose of easing short-term credit problems.

The Fed held a TAF auction on Monday, selling $30 billion in 28-day credit, and another $30 billion will be auctioned off on January 28. The interest rate bid on Monday's auction, 3.95%, is substantially lower than the current Fed funds rate (4.25%), indicating that the auction has succeeded in solving immediate "credit crunch" problems.

Last August, I wrote that "The nightmare is finally beginning." At that time, I was expecting that we'd follow the 1929 pattern, which would lead to a major panic around the end of September. Within a couple of weeks it became apparent that we were NOT following the 1929 pattern at that time.

However, we HAVE been following the 1929 pattern since January 1, and this may (OR MAY NOT!) indicate that we're close to a tipping point that would trigger a generational panic and crash.

It's no longer the case that "bad news is good news," and any bad economic news means that the Fed will lower interest rates, which makes it good news. Today, further Fed cuts are being taken for granted, and "bad news is bad news," driving the market lower.

Today we have tens or hundreds of trillions of dollars in various securities, especially credit derivatives, in the interlocking portfolios of hundreds (thousands?) of financial institutions, investment houses and hedge funds. If the market continues to fall in this way, then these highly leverage firms will begin going bankrupt. At some point, a bankruptcy will trigger a domino effect, a chain reaction, forcing further sales, causing a generational panic. There's no way to predict when that will happen, because it depends on chaotic (in the sense of Chaos Theory) events that can't be predicted, but the signs calling for increased watchfulness are present. (15-Jan-08) Permanent Link
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Throwing good money after bad: Bank of America will acquire Countrywide Financial

And Saudi Arabia and China plan to invest in Citibank, as writedowns increase.

Last August, hundreds of anxious investors panicked and mobbed the banks owned by Countrywide Financial Corp., demanding to withdraw their deposits, for fear that Countrywide would go bankrupt. The fears arose after Countrywide had drawn down its $11.5 billion credit lines, for fear that those credit lines would become unavailable.

A week later, Bank of America invested $2 billion in Countrywide in return for 16% ownership of the company.

Countrywide's problems in August were attributed to the worldwide "credit crunch" that occurred at that time. The credit crunch has eased considerably since then, thanks to massive amounts of liquidity being poured into the financial system by the Fed, the Bank of England, the European Central Bank, and other central banks.

But Countrywide's problems haven't abated. And no surprise -- Countrywide has been the leader in encouraging abusive use of credit in the last five years, having approved millions of "liar loans" to people with no income, no assets, no honesty, and no chance of making the payments after the initial "teaser" rates expire.

Countrywide reported its first loss in 25 years in the third quarter. Early this week, Countrywide admitted that its foreclosures and late payments on its mortgages hit a record high in December. Foreclosures were at double the level of December 2006, and overdue loans were 50% higher. This announcement caused Countrywide's stock to plummet, meaning that Bank of America has already lost a substantial part of the $2 billion investment that it made in August.

What's the solution?

On Friday, Bank of America agreed to acquire Countrywide completely for another $4 billion.

Is this "throwing good money after bad"? I have little doubt that it is. The WSJ says that it's "a gamble that the U.S. housing crisis is near a bottom and that Countrywide's assets won't further deteriorate," two assumptions that are both bound to be wrong. On the other hand, $4 billion is a cheap price for a company that was worth over $20 billion just a year ago, so perhaps there's enough of a cushion in there to make the deal worthwhile over the (very) long haul.

Countrywide's assets are bound to deteriorate further because the assets of almost every major financial institution continue to deteriorate.

Take Citibank for example. They're going to announce their fourth quarter earnings on Tuesday, and they're expected to be sharply lower.

Recall that Citibank tried to save itself by means of a fraudulent scheme known as a "Master-Liquidity Enhancement Conduit (M-LEC)." Under the scheme, Citibank and other banks would sell worthless CDOs to each other at inflated prices, in order to establish a phony "market price" for the CDOs. Citibank's fraudulent M-LEC idea didn't take off, forcing the bank to take $16.4 billion in writeoffs of worthless CDOs after all. Citibank might have gone bankrupt except that it was saved by a $7.5 billion investment by the Abu Dhabi Investment Authority.

Well, now the expectation is that Citibank is going to have to take even more writeoffs -- perhaps as much as $19 billion more -- to be announced along with the earnings statement on Tuesday.

At the same time, it's been reported that Citibank (actually Citigroup) is looking for new investments totalling $14 billion. The investments are to come from Saudi Prince Alwaleed bin Talal and from the China Development Bank.

It upsets us to see Bank of America throwing good money after bad, but we don't feel so much pain when it's foreign investors throwing good money after bad.

If you look at the big picture of what's going on in the world, what we're seeing is a corporate version of the Principle of Maximum Ruin.

This is a principle that I've discussed several times on this web site with respect to individual investors. It means that people will keep investing in the stock market until they lose everything - the maximum number of people will be ruined to the maximum extent possible.

What we're seeing now is a corporate version of the same principle.

Recall that the amount of money in the world is decreasing every day. This is because investors and institutions are becoming more and more risk aversion with credit. It's credit that creates money, and it's the abusive use of credit that's created the liquidity bubble that we've been living in the past few years.

But it all turned around in August. At that time, there was a massive shift in the attitudes and behaviors of great masses of investors, and they became much more risk-averse. With the use of credit being reduced, the amount of liquidity in the world is being reduced.

When low tide pulls the water from the shore back into the lake or ocean, it leaves behind little pools of water called "tide pools." Those tide pools don't last long, since they're drained away by leaks in the sand beneath them, but they exist for a while, and they often trap a variety of sea creatures with them.

Well, as the liquidity of the world pulls back and disappears, it leaves behind these liquidity tide pools -- in corporate coffers, but also in places like Saudia Arabia, Abu Dhabi, Singapore or Beijing. But the liquidity tide pools soon leak away, just as the water tide pools do.

The sizes of these country liquidity tide pools are listed on the US Treasury web site. Here's a listing of the most current posting:

        Country               Amount (billions of dollars)
        --------------------- ----------------------------
        Japan                 591.8
        China, Mainland       388.1
        United Kingdom        296.5
        Oil Exporters         130.3
        Brazil                112.8
        Carib Bnkng Ctrs       78.1
        Luxembourg             70.1
        Hong Kong              54.2
        Taiwan                 53.4
        Germany                44.1
        Korea                  43.3
        Singapore              35.9
        Mexico                 33.2
        Switzerland            31.7
        Turkey                 26.5
        Canada                 21.4
        Thailand               20.0
        Netherlands            19.5
        Sweden                 15.3
        Russia                 14.9
        France                 14.7
        India                  13.7
        Italy                  13.6
        Ireland                13.1
        Poland                 12.3
        Belgium                11.3
        Israel                 10.2
        All Other             139.5
        --------------------- ----------------------------
        Grand Total          2309.5

It seems like $2.3 trillion may seem like a lot of money, but remember that even mainstream analysts says that bank asset writedowns will cause a loss of $2 trillion in credit. When you consider that there are hundreds of trillions of dollars in credit derivatives in the world, $2.3 trillion is a drop in the bucket.

So these liquidity tide pools are not all that big in the grand scheme of things, and what we're going to see more and more is that these tide pools of liquidity will leak away, as the money is used to buy stakes in Citibank, or other investments -- in other words, by throwing good money after bad.

Thus, the Principle of Maximum Ruin will end up applying to Saudi princes and Chinese bankers as well as Main Street investors.

From the point of view of Generational Dynamics, there's a generational panic and crash coming, and it will be an equal opportunity financial destroyer. (13-Jan-08) Permanent Link
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Earnings estimates fall sharply again this week

The falling stock market is reflecting the reality of the earnings estimates.

Updating the table of falling fourth quarter corporate earnings estimates that I posted earlier this week, here's the summary from Friday from CNBC Earnings Central:

"As of Friday, January 11th:

31 companies in the S&P 500 have reported earnings for Q4, 64.52% have beaten estimates, 16.13% were in-line, and 19.35% have missed. (Data provided by Reuters Estimates)The blended earnings growth rate for the S&P 500 in fourth-quarter 2007, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -11.3%, down from -9.5% the previous week, attributed in part to downward estimate revisions in Financials, including Citigroup and Merrill Lynch.

At the start of the quarter, the growth rate for Q4 was 11.5%. (Data provided by Thomson Financial)"

We can now update the table of the changes in fourth-quarter earnings estimates since the beginning of the fourth quarter, as follows:

  Date    4Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct  1:             +11.5%
  Dec  7:              -1.3%
  Dec 14:              -3.8%
  Dec 31:              -6.1%
  Jan  4:              -9.5%
  Jan 11:             -11.3%

So the Q4 earnings estimates have fallen significantly again, in just one week.

The stock market is reflecting the falling earnings estimates, as you can seem from the bottom of my Dow Jones historical page. As of Friday, January 11, the Dow Industrials stood at 88% of the October 7 high, meaning that the index had fallen 12%.

On CNBC on Friday, the anchors provided more information than in the paragraph summary above. They provided current official analyst estimates of earnings growth in the 2008. Here's the table they displayed:

  Period  Earnings growth estimate (Thomson Financial)
  ------- --------------------------------------------
  Q4 2007      -11.3%
  Q1 2008      -12%
  Q2 2008      -14%
  FY 2008      +25%

Is this even possible? According to Thomson, earnings growth will fall 12% and 14% for the first two quarters of 2008, respectively, but then will rise so rapidly in the last half that the average for the year will be 25% growth. These people are in fantasyland.

The fantasy is that, as I've previously explained: When financial institutions announced their REAL fourth quarter earnings in the next couple of weeks, they'll have the "mother of all writedowns," and then all the writedowns will be over. As I explained, that's impossible.

The 25% growth figure is also impossible.

Instead, earnings growth is most likely to continue falling. Why? Because of the Principle of Mean Reversion. Earnings growth has been well above average -- at bubble levels -- for the last 12 years, and now we'll see "reversion of the mean," which requires that earnings growth be well BELOW average for another 12 years.

The trend that's displayed in the first table above -- showing a progressively lower estimate of fourth-quarter earnings growth -- that trend is going to continue, and earnings growth will continue to be low.

Generational Dynamics predicts that, with the stock market overpriced by almost 250% (same as in 1929), we're headed with absolutely certainly for a generational stock market panic and crash, leading to a new 1930s style Great Depression. (12-Jan-08) Permanent Link
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At the end, the world still remembers Hillary's remarkable climb to the top

It was 55 years ago that a beekeeper from New Zealand achieved international fame when he and his Nepalese guide Tenzing Norgay reached the top of Mount Everest, the world's highest mountain.

Edmund Hillary
Edmund Hillary

At his death on Friday at age 88, it's surprising how many people still remember and love Sir Edmund Hillary.

In fact, he still remains the New Zealander most admired by New Zealanders. He was also named one of Time magazine's 100 heroes and icons of the 20th century.

He was born in 1919 into the Hero generation that fought in World War II. Countless other expeditions had attempted to climb Mount Everest and failed, and so Hillary became an international hero when he became the first to succeed.

Remarkably, since 1953, over 3,000 climbers had repeated Hillary's feat.

However, Hillary, who became an avid environmentalist and humanitarian, railed against the environmental damage to Everest caused by the the steady stream of climbers, many of whom left their garbage behind.

Hillary was also shocked in 2006 when when as many as 40 climbers left a British mountaineer to die on Everest rather than attempt a rescue.

When Hillary was an active climber in the 50s and 60s, such a thing would never have happened. But now, Boomers and Gen-Xers are as unconcerned about ethics in mountain climbing as they are in finance and other fields.

"The whole attitude to Mount Everest has become rather horrifying," Hillary said in an interview. "People just want to get to the top. They don't give a damn for anybody else who may be in distress and it doesn't impress me at all that they leave someone lying under a rock to die."

The same things might be said about financial engineers who earned fat commissions by creating CDOs and other structured financial instruments, knowing full well that investors in them would lose everything. Like the Mount Everest climbers, these financial engineers aren't at all concerned about the people they left lying under a rock to die. (11-Jan-08) Permanent Link
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Befuddled CNBC anchors admit to having no clue as to what's going on.

And these guys are supposed to be experts.

Intraday Dow Industrials chart for Tuesday, January 8, 2008
Intraday Dow Industrials chart for Tuesday, January 8, 2008

Around 2:30 pm on Tuesday, the market started dropping like a stone.

The CNBC anchors were totally befuddled, though not dumbstruck.

CNBC commentator Dennis Kneale was completely stupified on Tuesday <font face=Arial size=-2>(Source: CNBC)</font>
CNBC commentator Dennis Kneale was completely stupified on Tuesday (Source: CNBC)

Here's what Dennis Kneale, CNBC's Media & Technology Editor, said at 3:08 pm, when asked why the Nasdaq index keeps falling:

"I've been looking at this and studying this and I ... I ... and so far, Maria, I can't find any more fundamental underlying scary reasons than the fact that it's been up really nicely and let's go ahead and take our profits. You look at some spending forecasts for '08. First quarter is going to be very slow; first half will be a little bit less slow; but by the end of '08, spending is going to be up considerably. One survey shows that small businesses, which is the bulk of spending in the US, 5 million companies, right? That they're going to spend an average of 5% more on IT in '08. Another survey came out and said, oh my gosh, only one quarter of companies say that their first quarter budgets are going to be higher than their fourth quarter budgets. So it's kind of mixed out there. But maybe this is just a matter of taking profit where you can. .. But what's falling apart here? Why is this market so nervous?"

He just can't figure out what's going on, can he? What's wrong with these investors? Don't they know that there's a survey that says that high-tech spending is going to up in the last quarter of 2008? Now, I ask you Dear Reader, are the investors that Dennis Kneale is criticizes all idiots, or is Dennis Kneale himself the idiot? It's hard to imagine a more airheaded answer than the one Kneale gave.

It's not hard to figure this out, and I gave the reason a couple of days ago: estimates of fourth quarter earnings have been plummeting, almost on a day to day basis.

Institutional investors all use pretty much the same method for deciding whether to buy or sell stocks. It's called the "Fed Model," and it's a fallacious but widely used investment formula derived from a single paragraph buried deep in a 1997 Federal Reserve report. The method uses a formula based on price/earnings ratios and treasury prices.

And so, with earnings estimates plummeting, P/E ratios are increasing, and so investors using the "Fed Model" are selling.

This isn't so hard to figure out, but instead we have this so-called expert saying, " I've been looking at this and studying this and I ... I ... and so far, Maria, I can't find any more fundamental underlying scary reasons...." What clowns. (9-Jan-08) Permanent Link
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Iranian speedboats threaten to blow up US ships in Gulf of Hormuz

Question: Why did Iran do it?

Map of Gulf of Hormuz where incident took place <font face=Arial size=-2>(Source: BBC)</font>
Map of Gulf of Hormuz where incident took place (Source: BBC)

Five Iranian speedboats approached US Navy ships operating in the Gulf of Hormuz on Sunday.

They approached at high speed and, in a radio transmission, said, "I am coming at you. You will explode in a couple of minutes."

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Iran is using cartoons to fight decline in anti-Americanism: Anti-Americanism has been declining in Iran for ten years,... (24-Mar-07)
Iran and Russia increasingly at odds over Iran's nuclear development: Saying that Moscow "will not play anti-American games" with Iran,... (17-Mar-07)
The U.S. vs Iran debate may be unifying the Iraqis: Iraqis don't want interference from either America or Iran.... (2-Feb-07)
Iran's President Mahmoud Ahmadinejad holds two-day Holocaust denial conference: He says that Israel "will soon be wiped out."... (13-Dec-06)
Iranian president Mahmoud Ahmadinejad threatens Europe and Israel: He also says he has a "connection with God"... (20-Oct-06)
Iran test fires submarine to surface missile in the massive "Blow of Zolfaqar" military games: Iran (like China) continues rapid militarization, while confrontation over nuclear development looms.... (28-Aug-06)
Iran and Ahmadinejad are waiting for the Mahdi: Most people know about the belief by Christian fundamentalists about the Second Coming of Christ,... (22-Aug-06)
Iranian President Mahmoud Ahmadinejad is a very charismatic leader: In his 60 Minutes interview, he was witty, charming, confident and deadly.... (14-Aug-06)
Iranian representatives witnessed North Korea's July 4 missile tests: According to Assistant Secretary of State Chris Hill,... (21-Jul-06)
Allah Akbar!! Ahmadinejad announces that Iran is enriching uranium: Clearly trying to provoke an Israeli or American military attack on Iran,... (13-Apr-06)
State of the Union speech displays continuing misreading of Iran: It's wishful thinking to believe that an overthrow of the Mullahs is coming.... (1-Feb-06)
Europe resigns itself to a nuclear Iran: Defiant Iran President Mahmoud Ahmadinejad continues to lead Iran to be the regional superpower,... (16-Jan-06)
Iran appears to be positioning itself as a post-war superpower: Iran restarts its nuclear enrichment program while calling for Israel's removal.... (11-Jan-06)
Iran will set up a "love fund": Iran's new president, Mahmoud Ahmadinejad, plans a billion dollar fund... (31-Aug-05)
Feminism flourishes in Iran, as the international crisis on nuclear weapons intensifies: Iran's new president, Mahmoud Ahmadinejad, named a hardline Islamist cabinet on Sunday,... (15-Aug-05)
Iran's plan to develop nuclear fuel is "irreversible": France calls it a "major international crisis"... (3-Aug-05)
Ultraconservative Mahmoud Ahmadinejad wins Iran Presidential election: I try to find humor wherever I can for this serious web site, and with this guy it's easy.... (25-Jun-05)
Iran holding chaotic runoff election on Friday: Iran and Iraq are generational twins, and their elections show it.... (23-Jun-05)
Iran: Tehran University student unrest is building against the government: "Moderate" President Mohammad Khatami blamed the hard-line Muslim clerics... (8-Dec-04)
Iran moves forward with developing nuclear weapons technology: Iran has indicated that it won't budge on its plans to develop nuclear enrichment technology,... (22-Oct-04)
Iraq Today vs 1960s America (Revised): They have much in common: Bombings, assassinations, student demonstrations, violent riots, calls for insurrection and civil war and harsh rhetoric. That's much more than a coincidence. (8-May-2004)
Riots in Iran: Will there be a violent overthrow of the Iranian Mullahs? Generational Dynamics says 'No.' (25-Jun-03)

The US ships were just about to fire on the Iranian speedboats when they suddenly turned away, ending the confrontation.

The Pentagon has released a video of the confrontation, and it can be seen on the BBC web site.

The U.S. has called the confrontation "provocative and dangerous."

Iran played down the event, calling it an "ordinary occurrence," saying that, "this... happens for the two sides every once in a while and, after the identification of the two sides, the issue is resolved."

So what the heck was this? Why did the Iranians do it?

One possibility is that it was done by rogue Iranian forces, although no one is claiming that. The speedboats are actually thought to be from Iran's Revolutionary Guards, which the US has designated as a terror organization.

In fact, this kind of thing this kind of bellicose action is quite consistent with mainstream Iranian policy, according to the lengthy analysis of Iranian policy that I wrote last July.

My best guess for Ahmadinejad's motivation of this attack is as follows:

The 1979 Islamic Revolution in Iran appears to me to be assuming mythic proportions in the radical Muslim community. At that time, a violent student-led overthrew the Western-aligned government of Iran and installed a hardline religious Muslim government.

It's become an important symbol for al-Qaeda, who would like to see it repeated in other countries. They tried it in Iraq, and they're trying it now in Pakistan. (As predicted, it failed in Iraq, which is in a generational Awakening era, but it or something like it will succeed in Pakistan, which is in a generational Crisis era.)

What's less obvious is that Ahmadinejad and the hardline Iranian mullahs would like to see a repeat of something like the 1979 revolution in Iran. If they could provoke a military strike from Israel or the US, then (the fantasy goes) the "spirit of the revolution" will be rekindled, national unity and a national zeal for Islamic purity will be restored. Sunday's confrontation might well have had that intention.

But there's no chance it will have the desired effect on the Iranian people. Iran is in a generational Awakening era and, just like America in the 1960s, it's a time of a "generation gap," and anti-government riots and demonstrations. Just as the students in the 1960s blamed the government for the Vietnam war, today's Iranian students would blame the Iranian government for any military confrontation with Israel or the US.

On a related subject, MEMRI reports the following interesting stuff:

"Ahmadinejad Gov't Backs Down From Islamic Dress Code Enforcement

Reports in the Iranian media are indicating that in the run-up to the March 2008 parliamentary elections, the government of Iranian President Mahmoud Ahmadinejad is trying to renounce its responsibility for the campaign to enforce the Islamic dress code and public order.

The government is claiming that the police, who are implementing the campaign, are not directly accountable to the government and have not yet presented a plan of action to it for approval.

The dress code enforcement policy, which is supported by Ahmadinejad's spiritual mentor Ayatollah Taqi Mesbah-e Yazdi and Ayatollah Nori Hamdani, has been implemented by police in many public places as a show of strength by the Ahmadinejad government."

An obvious criminal at large on the streets of Tehran (from April 2007) <font size=-2>(Source:</font>
An obvious criminal at large on the streets of Tehran (from April 2007) (Source:

This has been an absolutely hilarious story from the time it first started last April. (See "Iranian police swoop down on women with loose headscarves.") Just as there was a "women's lib" movement during America's last Awakening era, in the 1960s, there's also a similar movement beginning in Iran.

Young women have been protesting against the government by wearing hot fashions and loose headscarves. This is NOT in the spirit of the 1979 Iranian revolution. So Ahmadinejad has been rounding up women in loose headscarves and hauling them up to jail. Can you believe this? It cracks me up every time I read about it. It's bad enough having one woman angry at you, but Ahmadinejad has probably managed to piss off every young woman in the country.

So it's not surprising to me that we're seeing news that Ahmadinejad is backing down. He never stood a chance with this.

However, these stories are not unrelated.

The point is that there IS an important connection between the loose headscarf story and Sunday's confrontation in the gulf of Hormuz.

The hardline Iranian mullahs are not very happy with the hot, stylish clothing and loose headscarves being worn by young Iranian women. Nothing like this would have happened just after the 1979 revolution, when the spirit of Islamic law was high. The naval confrontation is quite likely an attempt by the Iranian government to frighten young Iranians -- especially young Iranian women -- into returning to the hardline ways of Islamic law. But anyone who knows anything at all about women (which includes almost everyone but me) knows that there isn't a snowflake's chance in hell that that plan will work. (9-Jan-08) Permanent Link
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Estimates of fourth quarter earnings continue to plummet

Stock prices have continued their downward trends, as price/earnings ratios rise.

Here's the summary from Friday from CNBC Earnings Central:

"As of Friday, January 4th:

25 companies in the S&P 500 have reported earnings for Q4, 68.00% have beaten estimates, 12.00% were in-line, and 20.00% have missed. (Data provided by Reuters Estimates) The blended earnings growth rate for the S&P 500 in fourth-quarter 2007, combining actual numbers for companies that have reported, and estimates for companies yet to report, stands at -9.5%, attributed in part to downward estimate revisions in Financials.

At the start of the quarter, the growth rate for Q4 was 11.5%. (Data provided by Thomson Financial)"

And so, if we put together a table of the changes in fourth-quarter earnings estimates since the beginning of the fourth quarter, we get the following:

  Date    4Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct  1:             +11.4%
  Dec  7:              -1.3%
  Dec 14:              -3.8%
  Dec 31:              -6.1%
  Jan  4:              -9.5%

In other words, earnings estimates become gloomier and gloomier as each day goes by. Over the next 2-3 weeks, companies are going to be reporting their ACTUAL fourth quarter earnings, so we'll soon know which estimates are valid.

In the "bad news is good news" view of the cheerleaders for the stock market bubble, the optimistic view of this situation is as follows:

Well, that's the kind of thing that we've been hearing for a long time now, and these kinds of optimistic remarks have been wrong every time for a couple of years.

The problem is that there's no way for these financial institutions to know how much of their portfolio is worthless. It's a moving target, a domino effect. As one set of assets is written down, all of the company's assets are put into doubt, the remaining assets might lose their AAA ratings, and that will cause other assets to become worthless.

Just to give one example: CDSs (credit default swaps) are derivative securities that someone purchases from an insurer, who will guarantee that your investment will be repaid if your mortgage-based CDOs become worthless. Under those conditions, your CDOs might have AAA ratings, since they have "double protection" from loss. It's like buying hurricane insurance on your home -- if there's a hurricane, you'll have your home or you'll have money from the insurance policy, so you'll be OK either way.

But what if the insurance company has insured thousands of homes in the same region, and a hurricane strikes and destroys hundreds of those homes? Then the insurance company can go bankrupt, and those hundreds of people are left with neither their homes nor any money.

In the case of CDOs that you've "insured" with CDSs, you're OK as long as the company providing the insurance (known as the "counterparty") is able to repay you. But what if the insurance company has insured billions of dollars in mortgage-backed CDOs, and can't pay if too many of the mortgages end in default.

In fact, this is a story that's been simmering for several weeks. There are a number of companies called "bond insurers." One of these high-flying financial firms, ACA Capital Holdings Inc, lost its investment grade credit rating last month. Now, if your portfolio happens to hold CDOs that are insured by ACA, if ACA loses its rating, then so do your CDOs.

The two largest bond insurers, MBIA Inc and Ambac Financial Group, have been put on notice by Fitch Ratings to find investors or they will soon lose their ratings as well.

These are just a few of the many examples of how the domino effect works. When one set of securities goes down, then it can trigger a fall in another set of securities.

And so, the wishful thinking that the "mother of all writedowns" will occur within the next two weeks, and then it will be over, is literally impossible, since there's no way to know how far it will go. In fact, it won't be fully known for months, if not years.

As earnings estimates fall, price/earnings estimates are rising.

Since most firms use the same models for deciding whether to buy or sell stocks, the stock market as a whole has been trending downward, to match the negative earnings forecasts.

From the point of view of Generational Dynamics, the stock market is overpriced -- by a factor of around 250% -- as I explained in my article "How to compute the 'real value' of the stock market," and we're headed for a generational stock market panic and crash that will lead to a new 1930s style Great Depression.

I recently wrote an article, "Will hyper-inflation make the dollar worthless (like the Weimar republic)?" in which I discussed why, after that crash occurs, the dollar currency will NOT become worthless through inflation, but in fact will become more valuable through deflation.

I've received a number of questions from readers about this article. I apologize for not having answered them all yet (I've been swamped with other work), but soon I will be posting an article answering these questions at length. The short answer -- and the answer that most of the questioners overlooked -- is that once a generational crash occurs, it will have such an overwhelming affect on the American people, that they'll change their attitudes and behaviors in many ways, including turning from spenders into savers. This is the kind of thing that generational theory predicts, and I'll explain why soon. (8-Jan-08) Permanent Link
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Kenya is almost -- but not quite -- on the brink of genocidal ethnic war

There are hundreds of thousands of refugees displaced from their homes, and hundreds killed in ethnic violence in Kenya, according to United Nations estimates. The result is a worsening humanitarian crisis, as shelter, water, food, sanitation and protection are needed for the refugee camps.

These estimates, as well as the horrific church massacre that I described several days ago are definitely signs of an incipient generational crisis war between ethnic groups.

However, as I described, Kenya is just a few years early on the generational timeline for such a crisis war to occur, and so a crisis war is UNLIKELY at this time.

However, it's also quite certain that the nation is teetering on the edge of such a war, and a major "incident" within the next few years could easily push the country over the edge.

Marcy Kadenyeha, human rights activity, Luo tribe, Kenya <font face=Arial size=-2>(Source: BBC)</font>
Marcy Kadenyeha, human rights activity, Luo tribe, Kenya (Source: BBC)

Although there are many ethnic groups (tribes) in Kenya, there are two major protagonists in the current violence: the market-dominant Kikuyu tribe, whose leader, Mwai Kibaki, won the Presidential election that triggered the violence; and the disadvantaged Luo tribe, whose political leader, Raila Odinga, was the opposition leader who lost the election to Kibaki.

The ethnic violence was started, according to many sources, by youthful activists in the Orange Democratic Movement (ODM), an anti-government Luo ally supporting Odinga for President.

The BBC on Monday ran an interesting interview with a Luo woman describing how the violence started. The reporter started by saying that in her town there had been multi-ethnic living in peace for decades -- since the end of WW II.

The woman being interviewed, Marcy Kadenyeha, is a Luo, and so is a natural ally of ODM, whom she accused of starting the violence:

Marcy: "On the 29th, 2 in the morning, Kikuyus were celebrating while the other people were crying, and people were full of anger, because the majority here in Langata (sp?), the ODM by blood, said it [Kibaki's victory] can't happen like this - [because] we all know that most of the Kenyans voted for Raila [Raila Odinga, the Luo opposition leader who lost the election.]

So while the Kikuyus were celebrating, the other people were very angry and they were, like, going to fight them. It's the people who were living together who feel like they no longer have something in common. ... They were living together like one family, but now it [the Kibaki victory] split them.

Reporter: ODM's message was a poverty message, but Raila began to speak of something called "majimbo." It can mean redistribution of wealth, but on these streets, it meant something more.

Marcy: OK, on the issue of majimbo, Luo is saying that resources should be distributed according to all constituencies, that each constituency is even at home, all produce they should get equal shares.

But now, the people who are here, they said they want to start the "local majimbo." And what they meant by "local majimbo" is that if you are a Luo, you join the other tribes, but never should you make a mistake of joining Kamba and Kikuyus."

I apologize for the poor transcript; I got as much as I could understand. Note: "Majimbo" is a Swahili word for self-rule, and resistance to Kikuyu domination. (This paragraph corrected on 29-Jan.)

But what's clear is that Kibaki's election victory caused overnight changes in attitudes and behavior in both the Kikuyu and Luo people. It's these changes in behavior and attitudes in large masses of people that have the greatest significance to Generational Dynamics.

It's also pretty clear that these ethnic hatreds did not occur all at once, at 2 am on December 29. Obviously they'd been building for years, the people were in denial about them, and the election triggered a massive release of emotions that had been hidden up to that point. To put it another way, the Kikuyus and Luos had obviously been hating each other for a long time, but hid their hatreds until they were triggered by the election victory.

(Putting the above paragraph into another context, think about the euphoria over Barack Obama, and how infuriated his supporters will be if he loses an election under suspicious circumstances.)

Long-time readers of this web site may recall that on several occasions I've mentioned the following: that the Palestinians don't seem to have anything like the pure venomous hatred of Israelis that Hamas and Fatah have for each other.

In case there was a question in your mind as to what I meant, it's that I wasn't hearing the Palestinians and Israelis describing each other in the same kinds of terms that the Kikuyus and Luos have been using -- or in the same terms that Hamas and Fatah have been describing each other.

Now, of course, it may simply be that the right triggering event hasn't yet occurred. After all, it was Hamas' stunning Gaza election victory last June that led to the Palestinian factional violence. It may also be true that the "security wall," built under the direction of former Israeli Prime Minister Ariel Sharon, has kept a massacre from occurring.

From the point of view of Generational Dynamics, we're able to watch a number of examples of countries on the road to genocidal crisis wars. Pundits, politicians, analysts and journalists don't have the vaguest clue what's going on in any of these regions, but Generational Dynamics provides a methodology for analyzing their similarities and unique differences, as we proceed on the road to the Clash of Civilizations world war. (8-Jan-08) Permanent Link
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Anxious Americans become euphoric over Barack Obama

This kind of euphoria has occurred twice before recently.

Part of the euphoria we're seeing over Obama is rational. Most blacks, and also many whites, are excited by the possibility of the first black President. This was apparent several weeks ago with Oprah Winfrey's full-throated support of the first major black candidate, and how Obama is the potential fulfillment of Martin Luther King's dream. Ironically, there's been very little similar support for Hillary Clinton as the possibility of the first woman President.

Covers of <i>Newsweek</i> and <i>The Weekly Standard</i>
Covers of Newsweek and The Weekly Standard

The excitement is plain from the latest news magazine covers.

The cover story in liberal Newsweek Magazine was titled, "Inside Obama's Dream Machine."

Even the conservatives are excited, as can be seen from the cover of The Weekly Standard, referring to "The Fall of the House of Clinton."

But what's been going on the last couple of days goes well beyond rationality. We've seen this kind of euphoria twice in the last 13 months:

From the point of Generational Dynamics, widespread euphoria is a very important phenomenon, because it indicates a viewpoint, and often a change in viewpoint, of large masses of people. Recall that Generational Dynamics is concerned with opinions and behaviors of large masses of people, entire generations of people, and rarely concerned with the opinions and behaviors of politicians, except insofar as they represent large masses of people.

Chris Matthews is very popular among the so-called "anti-war Democrats" because of his open vitriolic hatred of President Bush, his abysmal ignorance of what's going on in the world, and his belief that he knows more than anyone else. He's a good barometer of the views of many Democrats.

In the coverage of the Iowa caucuses on Thursday evening, Matthews was extremely giddy about Obama. Here's some of what he said, as transcribed by Media Research Center:

"If [Obama] wins tonight that's the shot heard ‘round the world. This is Lexington and Concord with the target being not King George but President George this time. ...

If Obama wins this caucus it will be the biggest political story in maybe 20 or 30 years our of this country. ... There's no doubt about it. And there's no way to read it except as a rebuke to President Bush. ...

This country and this is not a partisan comment, this is the country's view right now. We are in a rut. We are stuck in this rut. We are stuck in Iraq. No one has any idea how to get out of Iraq. Sure we've had the surge succeed but that's not the way to get out, that's just more stuck. We're more necessary. We've got a situation on every issue where the two sides are divided 50/50. Nancy Pelosi gets whacked everyday because she can't get the job done because she doesn't haven't the 60 senators to get the job done on the Senate side. So we have climate change, we're not doing anything really. We're not doing anything on energy. We're not doing anything on social security, Medicare reform. We're not doing anything on the war or on foreign policy. Everything is stuck. It's intractable. And I think the American people feel that. It's coming across in our NBC polling. People don't like the direction. They want something to happen. Now here's the question. Will they follow through and pick one side or the other to run the government and get something done? Or will they pull back again and clinch and divide power again? Which they've done before, which does bring about gridlock. ...

It's all a big picture here. You know I'll bet there's not a Peace Corps volunteer in the country who served in the Peace Corps in the ‘60s, ‘70s, ‘80s, ‘90s or recently that won't vote for this guy. He is so emblematic of our attempt, I think, to rejoin the world."

Matthews' giddy ranting does, I think, capture the feelings of many Democrats.

The problem with this euphoria is that it represents a kind of mass bipolar disease which we've seen many times before.

Investors, for example, have had wild swings in emotions, going from huge anxieties one day to near-depressive panic on other days, depending on a word or two from almost anyone about what the Fed is going to do.

It's it's worth remembering about the aftermath of the bizarre 6-Dec-2006 that I described above. On January 13, right after President Bush announced the "surge" of troops being sent to Iraq, Chris Matthews went on a lengthy vitriolic and hysterical rant on MSNBC.

Also important is that this kind of hysterical ranting does not lead to good decision making. The "surge" appears to have been extremely successful in Iraq. If we had listened to the hysterics of Matthews in January, we might have suffered a major defeat in Iraq.

And this brings me to an important point: The vitriolic rantings of someone like Matthews are exactly the kind of thing that lead to panicked reactions during generational Crisis eras.

If the Administration had panicked the way Matthews did, then the "surge" might not have taken place, and America might have suffered a defeat.

And if you have "anti-war" views to the point where you wish the "surge" had never been tried, then you're going against the tide in a generational Crisis era. If America had suffered a defeat in Iraq, then there might well have been another panicked reaction, this time to declare all-out war against insurgents in Iraq.

We saw this kind of war panic in summer, 2006, when two Israeli soldiers were kidnapped near the Lebanon border and and Israel panicked and launched the Lebanon war within four hours, with no plan and no objectives.

We may be seeing exactly the same sort of thing now in Sri Lanka, where the government has declared all out war against the Tamil Tiger rebels.

When the Iraq ground war began in 2003, there was a great deal of euphoria surrounding it, including among the very same people who are criticizing it now. Here's how historian Wolfgang Schivelbusch describes the beginning of war in his 2001 book, The Culture of Defeat: On National Trauma, Mourning, and Recovery:

"The passions excited in the national psyche by the onset of war show how deeply invested the masses now were in its potential outcome. Propaganda had reinforced their conviction that "everything was at stake," and the threat of death and defeat functioned like a tightly coiled spring, further heightening the tension. The almost festive jubilation that accompanied the declarations of war in Charleston in 1861, Paris in 1870, and the capitals of the major European powers in 1914 were anticipatory celebrations of victory-since nations are as incapable of imagining their own defeat as individuals are of conceiving their own death. The new desire to humiliate the enemy, noted by Burckhardt, was merely a reaction to the unprecedented posturing in which nations now engaged when declaring war.

The deployment of armies on the battlefield is the classic manifestation of collective self-confidence. If both sides are not convinced of their military superiority, there will be no confrontation; rather, those who lack confidence will simply flee the field. Accordingly, the battle is decided the moment the confidence of one side fails. The will to fight ("morale") evaporates, the military formation collapses, and the army seeks salvation in flight or, if it is lucky, in organized retreat. The Greek term for this point in space (on the battlefield) and time (the course of the battle) was trope. The victors demarcated the spot with the weapons of the vanquished and later with monuments, yielding the term tropaion, from which we get our word trophy." (p. 6-7)

The euphoria goes on until something goes wrong, as has happened to Americans since 2003, even though we've never had any really major military disasters in Iraq.

The panicked reaction can be much greater when a military disaster occurs. In his 1832 book, On War, General Carl von Clausewitz describes what happens:

"The effect of defeat outside the army -- on the people and on the government -- is a sudden collapse of the wildest expectations, and total destruction of self-confidence. The destruction of these feelings creates a vacuum, and that vacuum gets filled by a fear that grows corrosively, leading to total paralysis. It's a blow to the whole nervous system of the losing side, as if caused by an electric charge. This effect may appear to a greater or lesser degree, but it's never completely missing. Then, instead of rushing to repair the misfortune with a spirit of determination, everyone fears that his efforts will be futile; or he does nothing, leaving everything to Fate."

From the point of view of Generational Dynamics, these huge emotional swings are typical of generations -- like America's Boomers and Gen-Xers today -- that were born after the previous Crisis war and have no personal memory it. With no prior experience to guide them, their emotions suffer wild swings, and their behavior does as well.

(Incidentally, the same thing is true for financial crises. At some point soon there will be a new 1929-like panic, since the people who lived through the 1929 panic are not almost entirely gone.)

That's why the euphoria over Obama is actually a sign of a country in a generational Crisis era headed for war. The euphoria and the hopes will continue until something goes really wrong -- such as a new terrorist attack on American soil. At that time, the hysterical ranting will the giddy excitement will go in the opposite direction, and American will soon be involved in the Clash of Civilizations world war. (6-Jan-08) Permanent Link
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Sri Lanka government declares all out war against Tamil Tiger rebels

Sri Lanka has said it is formally withdrawing from a 2002 ceasefire agreement with the Liberation Tigers of Tamil Eelam (LTTE), informally known as the Tamil Tiger rebels.

Ethnic map of Sri Lanka, around 1975.
Ethnic map of Sri Lanka, around 1975.

Sri Lanka military commanders are promising to defeat the Tamils once and for all by the end of 2008. "We can bring the war against the LTTE to a turning point once we are able to destroy the LTTE capabilities to operate in bunkers and forward defence lines," says the Chief of the army.

The civil war between the two Sri Lankan ethnic groups -- the market and government dominant Sinhalese vs marginalized Tamils.

The Sinhalese came to the island of Ceylon from northern India around 500 BC, and adopted the Buddhist religion around 300 BC, developing a great civilization. They speak the language Sinhala, and today they're about 70% of the population of Sri Lanka (the modern name for Ceylon).

The Tamils occupied the southern tip of India as early as 1000 BC, in what is now the Indian province of Tamil Nadu. They adopted the Hindu religion, and came to Ceylon in the 7th century AD. In the 14th century, they seized power in northern Ceylon and established a Tamil kingdom. They speak the Tamil language, and today they're about 10% of the population of Sri Lanka. (Muslims and Christians comprise the remainder of the population.)

Indian subcontinent, with the island of Sri Lanka off the southern tip of India.
Indian subcontinent, with the island of Sri Lanka off the southern tip of India.

The LTTE began as a separatist group in 1976, and began low-level terrorist attacks and battles with government forces in 1983, until a ceasefire was signed in 2002.

The peace treaty started falling apart in 2005, and violence took a big surge upward in summer 2006, while the world was watching the war in Lebanon, as I described at the time.

Foreign governments are expressing "concern" and disappointment that the government has decided to abandon the ceasefire agreement, which they claim was worthless anyway.

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Australian Govt. warns citizens to avoid Sri Lanka: The war between Tamil Tiger rebels and Sri Lanka government continues to escalate,... (20-Oct-06)
While world watches Lebanon, Sri Lanka goes to war: Tamil Tiger rebels have engaged Sri Lanka government forces in heavy fighting... (3-Aug-06)
Massacre of civilians in Sri Lanka leading the way to a crisis war: From the point of view of Generational Dynamics, the gratuitous murder of civilians in a war... (18-Jun-06)
Violence leading to Sri Lanka war is increasing: Tamil Tiger rebels are being blamed for a mine attack on a bus, killing 60 people including children.... (16-Jun-06)
Sri Lanka appears close to war: A naval attack by Tamil Tiger rebels and government retaliation by air may spiral into full-scale war.... (12-May-06)
Indian MP says that bird flu is a 'scam' to sell 'Tamil-flu': This sounds like a joke, but unfortunately it isn't.... (3-Dec-05)

Still, the announcement that the government army intends to defeat the Tamils by the end of 2008 is, by itself, a significant event. Up till now, many Tamils were resisting participation in the conflict, but this announcement will unite them.

We now have three "minor" incipient or actual crisis civil wars going on:

In fact, all three of these countries have followed and are following the same general pattern: It begins with low-level but gradually increasing violence for a couple of decades. When the violence reaches a certain point, everyone gets scared and both sides agree to stop fighting. That agreement lasts only a short time, before a final generational change turns it into a full-scale crisis war.

That's not just true in small countries, of course. It's happening in Pakistan, where the Pakistanis are increasingly joining forces with al-Qaeda.

And it's happening in the relationship between Japan and China, where the hostility became so bad in 2005 that both sides took steps to reduce the tension. Japan even went so far as to elect an older generation Prime Minister who recently took a trip to suck up to China.

From the point of view of Generational Dynamics, all of these countries are following the same type of pattern along each country's generational timeline. Once these "peace" agreements are in place during generational Crisis eras, all it takes is a sufficient provocation by either country to stir up nationalistic fury in the younger generations of both countries, finally leading to full-scale war. (4-Jan-08) Permanent Link
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Post-election massacre in Kenya raises concerns of tribal war

Hundreds of people have been killed in ethnic violence since Monday, following accusations that the administration had rigged the weekend's election that won Mwai Kibaki a second 5-year term as President of Kenya.

The worst known atrocity so far occurred when 30 people died in a church fire. Dozens of people had gone to the church to escape increasing violence, when a youthful gang set the church on fire, trapping people inside.

There's widespread international concern that the situation will spiral into a full-scale civil war, but Generational Dynamics predicts that such a war is possible but unlikely for a few more years, and that the current round of violence is likely to fizzle out.

Kenya's last crisis war was the "Mau-Mau Rebellion." Britain had been exerting a fairly heavy hand as a colonial power, starting from the 1850s. An independence movement began in earnest in the late 1940s, leading to the rebellion that began in 1952 and climaxed in 1956. In the Recovery Era that followed, Kenya finally gained independence in 1964.

Thus, 51 years have passed since the climax of the last crisis war, making the current era a generational "Unraveling" era. During an Unraveling era (like America in the 1990s), a new crisis war is possible in the case of a foreign invasion, but is unlikely otherwise.

Thus, it's possible but unlikely for the current violence in Kenya to spiral out of control into a crisis civil war. As each year passes, however, the chances of a new crisis civil war increase.

As usual, the mainstream journalists, analysts and politicians have no idea what's going on. When I try to present generational theory to them, they simply blow me off, since they'd profer to keep getting things wrong, time after time.

What I've been hearing on CNN is that "the violence has surprised international observers, since Kenya has been recognized for its stability since it became independent in 1963, unlike other Sudan, Congo, Somalia and other African countries."

This paragraph contains the usual anti-African bigotry that we hear so often from the mainstream press and politicians. They view black Africa as a hotbed of continuing war, and war as a way of life for the black Africans. In their minds, this contrasts with Westerners who live in peace and tranquility.

Here's another bit of analysis from someone who has no idea what's going on:

"Past disturbances in Kenya have tended to peter out after a few days. That may happen now.

Yet Kenya is also in uncharted territory. Never before has there been a media blackout - with local television and radio stations forbidden from carrying live broadcasts - and never before have ethnic tensions run so high.

And never before have Kenyans feared the possibility of civil war. Yet, for the first time, many Kenyans say they believe that is just what could happen if the country's election controversy is not resolved soon."

This increasing level of conflict is exactly what is to be expected from generational theory.

What they don't understand is that different countries have different generational and crisis war timelines. Most of the West were committing huge atrocities during World War II, while many African countries were relatively untouched by that war. In the 1970s there were massively genocidal crisis wars in Vietnam and Cambodia, and in the 1980s they occurred in Iran, Iraq, Lebanon, Syria, and the former Yugoslavia. For some reason that isn't clear to me, mainstream journalists and politicians count these atrocities as exceptions, while they count similar atrocities in Africa as normal.

Darfur's last crisis war was World War II, ending in 1945. Incidents of tribal violence began in the 1970s, there was a brief war in the late 1980s, and a full-scale crisis war began in 2003, 58 years after the end of the previous crisis war.

So Kenya is about ten years behind Darfur on the generational timeline. Kenya had some low-level ethnic violence in the 1980s, a brief outbreak of ethnic clashes following the 1992 election, and now another round of ethnic clashes, including a few real atrocities.


Another interesting comparison between Kenya and Darfur is the fight over land resources.

In Darfur, the original incidents occurred between camel herders and farmers. (This is similar to the conflicts between cowboys and farmers in 1800s America.) The camel herders drive their herds over crops and kill them, which infurates farmers. Farmers retaliate by building fences, which infuriates herders.

In Kenya, the land conflict followed a different scenario. After the British were expelled, the leading Kikuyu tribe took over and became the dominant economic and government force in the country, taking over lands that had formerly been owned by the British colonists.

As population increased over the decades, another tribe, the Luos, were pushed toward the eastern edge of the country, especially into the region bordering the Indian Ocean, where they pursued their traditional lifestyles as fishermen. There are other Kenyan tribes as well, and many have been marginalized.

Although President Mwai Kibaki is a Kikuyu, when he won his first election in 2002, he was welcomed as someone who could unite all the tribes by means of his National Rainbow Coalition (Narc).

However, he became unpopular, thanks to repeated scandals and large-scale corruption in his administration. Furthermore the Luo tribe felt increasing marginalized and poor.

A major symbol of the disagreement between Kikuyus and Luos is that Kikuyus traditionally have considered female circumcision to be essential, while Luos do not practice it. (This is an example of how wars and conflicts cause religious symbols to be adopted. That is, as I've written before at length, war causes religion. Religion does not cause war, as some claim.)

And so, according to one blogger, The Kikuyu despise the Luo as uncircumcised fish-eaters, while the Luo see the Kikuyu as arrogant and greedy westernised Africans who have abandoned their cultural traditions.

With that background, last week's election approached with two major candidates: The Kikuyu candidate Mwai Kibaki, and the Luo candidate, Raila Odinga. In the end, the final vote tally was 4,584,721 votes for Kibaki, and 4,352,993 votes for Odinga. The two tallies were close enough to cause Odinga to claim vote-rigging. Since corruption is widespread in the Kibaki administration, Odinga's claim led to the widespread violence.

So the stage is definitely getting set for a major ethnic civil war, but it's still just a few years too early along the generational timeline. (2-Jan-08) Permanent Link
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Japanese Prime Minister sucks up to China in a four-day trip

However, issues of substance in the East China Sea were left unresolved.

Japanese Prime Minister Yasuo Fukuda has just ended a four-day trip to China described by everyone as a "feel-good" trip. In particular, Fukuda attempted to defuse the bitterness caused by Japan's actions in World War II (the Nanjing Massacre and use of comfort women) by promising to "learn from history." Also, he promised to take China's side and oppose any moves by Taiwan toward independence.

However, little of substance was accomplished. The most important failure was to find an agreement to settle a bitter border dispute in the East China sea that affects control over vast oil reserves and other natural resources.

It was just three months ago that 71 year old Fukuda came to power, after a year of governmental near-paralysis under 53 year old former Prime Minister Shinzo Abe. The choice of Fukuda represented a remarkable reversion to an older generation. Abe was Japan's first PM born after World War II, and his scandal-ridden administration is considered by many to be a disaster.

Japanese Prime Minister Yasuo Fukuda and Chinese Premier Wen Jiabao shaking hands in Beijing. Identical twins, separated at birth? <font face=Arial size=-2>(Source: Xinhua)</font>
Japanese Prime Minister Yasuo Fukuda and Chinese Premier Wen Jiabao shaking hands in Beijing. Identical twins, separated at birth? (Source: Xinhua)

The generation that grows up during a crisis war (like America's "Silent Generation" that grew up during WW II or the "Progressive Generation" that grew up during the Civil War) is known in generational theory as having the "Artist" archetype, because they're so sensitive and willing to compromise. They grow up surrounded by death, destruction, and genocidal horror, and suffer a kind of "generational child abuse." Like any child abuse victims, they grow up to be sensitive and indecisive. As adults, people who grow during a crisis war are always avoiding difficult decisions, although once a decision has been made (possibly by other people), they can implement that decision ruthlessly.

Fukuda is in the Artist archetype, and so are the main leaders of China. President Hu Jintao and Premier Wen Jiabao, both born in 1942, grew up during the tail end of WW II, into the extremely violent Chinese "Communist Revolution" civil war that ended in 1949.

One can just imagine the feelings of Fukuda, Hu and Wen as they met with and talked to one another, and each realized he was talking to someone who had tried to massacre his parents' friends. These feelings must have been even more intense when Wen gave Fukuda a surprise gift of 1978 photograph of Fukuda's father, then Prime Minister of Japan, signing a peace agreement with China.

And so it's not surprising that Fukuda, Hu and Wen all got along so well. Fukuda and Wen even played a game of catch with one another at an all-smiles photo op. But it's also not surprising that neither of them could make the hard decisions necessary to forge a compromise on substantive issues.

Map of East China Sea and disputed region <font size=-2>(Source: BBC)</font>
Map of East China Sea and disputed region (Source: BBC)

The dispute over the East China Sea is not a new one. It's one of a number of issues that sparked massive anti-Japanese riots in Chinese cities in 2005, during a time of extremely tense relations between Japan and China.

A page one article in the Wall Street Journal in 2005 actually described the crisis in generational terms, as follows:

"Ten years ago, when Chinese navy ships were spotted in waters between Japan and China, a newly elected lawmaker named Keizo Takemi warned that the Chinese were surveying energy resources also claimed by Japan. He was ignored by senior colleagues, who said they wanted to keep smooth ties with Beijing.

This year, as China prepares to drill for natural gas below that same part of the East China Sea, Japan is reacting very differently. Mr. Takemi, now a leader on foreign affairs in parliament, put together a response that was surprisingly robust by Japanese standards: In March, Tokyo announced it will launch a rival drilling effort, to be protected by Japan's high-tech military if necessary.

"Our nation's sovereign rights are at stake," says Mr. Takemi, 53 years old."

The article describes "the emergence of a new generation of leaders with new notions about Japan's role in the world," and adds:

"These younger lawmakers, most in their 40s and 50s, want their nation to be more assertive. They are also willing to break old taboos about shows of military force, something Japan long avoided for fear of conjuring memories of World War II aggression. That's a big change from their predecessors, who avoided confrontation with China, instead showering it with billions of dollars in development aid out of guilt over Japan's brutal 1930s invasion. Memories are still raw in China of the Japanese attack, which historians say caused fighting and famine that killed millions of Chinese civilians."

Both China and Japan were frightened by the intensity of the anti-Japan riots in China in 2005, and since that time, both countries have made efforts to step back from potential war. Fukuda's visit to China is part of that effort.

From the point of view of Generational Dynamics, the "feel-good" phase of Japan-China relations won't last long. The generational forces described in the article just quoted are increasing every day, as WW II survivors die off, and are replaced with increasingly nationalistic leaders in both China and Japan.

Right now, there's a strong motivation on both sides to avoid conflict. Japan is frightened of a militaristic China, and experiencing shame over its WW II atrocities. China is preparing for the Beijing Olympic games this year by acting like a teenage girl preparing for a sweet 16 coming out party who doesn't want anything to spoil it for her.

But Generational Dynamics predicts that the generational forces will overcome these motivations, and there will be a new genocidal war between Japan and China, as a component of fast approaching "Clash of Civilizations" world war. (1-Jan-08) Permanent Link
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