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Web Log - April, 2008

Summary

Home prices fall by the most on record

The housing news continues to get worse and worse.

I don't report on the latest housing news the way I used to because it's always the same -- prices fall, sales fall, inventories grow, foreclosures are surging. You don't need me to tell you what's going on -- it's in the news practically every day.

People who first said that there wasn't a housing bubble, then said that housing prices wouldn't fall, then said that they wouldn't fall far, then said that the fall in prices was over, then said that the fall in prices was over, then said that the fall in prices was over, etc., etc. -- all of those people were wrong, time after time.

On Tuesday morning, the new Case-Shiller home price indexes were released, showing declines in all 20 cities in the survey. Prices have fallen 12.7% in the last year.

The reason I wanted to cover this is because the Calculated Risk blog posted a very revealing graph of the situation:


Case-Shiller index results for February, 2008 <font size=-2>(Source: CalculatedRisk)</font>
Case-Shiller index results for February, 2008 (Source: CalculatedRisk)

There are several interesting things about this graph. (And by "interesting," I mean "depressing.")

First, you can see by the shapes of the curves that prices are in free fall, and there's no sign whatsoever of leveling off.

Furthermore, even in the best case scenario that you could hope for -- that next month the curves start leveling off (go through a point of inflection), forming a new "U", they would still continue falling for several months until the bottom of the "U" was reached. And that's the most optimistic scenario. The more likely scenario is that prices will keep falling for at least a couple of years.

Last, there was never much of a bubble in Denver and Cleveland, as you can see from the graph, but prices are still falling sharply, as if there HAD been a bubble. This shows that price plunges are going to far overshoot the long term trend line, and end up much lower than if a bubble had never occurred. (This result would be predicted anyway by the Law of Mean Reversion that I talk about all the time.)

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (30-Apr-08) Permanent Link
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Food crisis suddenly becomes a top media issue

Is Al Gore planning a new movie, perhaps "An Inconvenient Famine"?

We're now into the second week of major mainstream media news coverage of the food crisis. After eight years of steadily rising food prices, it's about time.

Here's how one news story described the situation in Haiti:

"On the roof of the former prison, enterprising women prepare something that looks like biscuits and is even called by that name. The key ingredient, yellow clay, is trucked in from the nearby mountains. The clay is combined with salt and vegetable fat to make dough, which is then dried in the sun.

For many Haitians, the mud biscuits are their only food. They taste of fat, suck the moisture out of the mouth and leave behind an aftertaste of dirt. They often cause diarrhea, but they help to numb the pangs of hunger. "I'm hoping one day I'll have enough food to eat, so I can stop eating these," Marie Noël, who survives with her seven children on the dirt cakes, told the Associated Press.

The clay to make 100 of the biscuits costs $5 (€3.15) and has risen by $1.50 (€0.95), or about 40 percent, within one year. The same is true of staple foods. Nevertheless, the same amount of money buys more of the mud cakes than bread or corn tortillas. A daily bowl of rice is almost unaffordable.

The shortages triggered revolts in Haiti last week. A crowd of hungry citizens marched through Port-au-Prince, throwing stones and bottles and chanting, "We are hungry!" in front of the presidential palace. Tires were burned, and people died. It was yet another of the rebellions that are beginning to occur with increasing frequency worldwide, but which are still only a harbinger of what is yet to come."

Unrest is increasingly breaking out around the world, as illustrated in this map from Der Spiegel:


Food crisis: Map of riots and export bans <font size=-2>(Source: Spiegel)</font>
Food crisis: Map of riots and export bans (Source: Spiegel)

The above map shows the increasing number of countries that are limiting food exports, and the increasing number of places where food riots and other unrest are taking place.

For some time now, I've been making fun of the global warming "crisis" as big farce, whose major purpose was to give organizers the chance to take jet planes to vacation spots like Bali and run air conditioners all day, while they sit around and whine about not having the chance to get rich over "carbon credits." The whole thing is a joke.

Unlike global warming, the food crisis is an actual, real worldwide crisis.

The United Nations held a food crisis conference on Monday and Tuesday, but they didn't hold it in Bali. They held it at the United Nations offices in Bern, Switzerland.

Secretary-General Ban Ki-Moon said the following:


Ban Ki-Moon, UN Secretary General <font size=-2>(Source: BBC)</font>
Ban Ki-Moon, UN Secretary General (Source: BBC)

"Today, I would like to inform you about the outcome of our discussions concerning the dramatic escalation of food prices worldwide, which has evolved into what we believe is an unprecedented challenge of global proportions that has become a crisis for the most vulnerable. This has multiple causes, which includes escalating energy prices, lack of investment in agriculture over the past years, increasing demand, trade-distorting subsidies and recurrent bad weather. This crisis has multiple effects, with its most serious impact on the most vulnerable in the poorest countries. We see mounting hunger and increasing evidence of malnutrition, which has severely strained the capacities of humanitarian agencies to meet humanitarian needs, especially as promised funding has not yet materialized. ...

We have agreed on a series of concrete measures that need to be taken in the short, medium and long terms. The first and immediate priority issue that we all agreed was that we must feed the hungry. The CEB calls upon the international community, and in particular developed countries, to urgently and fully fund the emergency requirement of $755 million for the World Food Programme, and honour outstanding pledges.

Without full funding of these emergency requirements, we risk again the spectre of widespread hunger, malnutrition, and social unrest on an unprecedented scale. We anticipate that additional funding will be required."

Here we see the first problem. Ban and the U.N. don't have a snowflake's chance in hell of getting that money. As Ban suggests, a number of countries (not the U.S.) have even not honored their outstanding pledges, and it's highly doubtful that they'll honor them AND pledge even more money.

Ban used the word "unprecedented" twice in the above quote. He said it was "an unprecedented challenge of global proportions," and that "we risk again the spectre of widespread hunger, malnutrition, and social unrest on an unprecedented scale."

Wrong, wrong, wrong. There is nothing unprecedented about this. This happened before WW II and before WW I. It happens before and during almost every major war, and is part of the complex of factors that lead to war. Fat and happy people don't need to go to war; starving people have no choice. This problem is VERY precedented.

As an example, read the account of the 1943 famine in India, in my November article, "UN expert calls biofuels a 'crime against humanity.'"

It always surprises me how many people still vastly underestimate the seriousness of this problem. Several web site readers over the years have suggested that new food technologies like hydroponics will solve any food shortage problem. Maybe they will ... some day, but there's no technology that will help in the short to medium term.

Other people believe that the food crisis is simply a bubble, and that the bubble will burst by natural means before long.

In support of this, a web site reader on Tuesday referred me to an article by John P. Hussman, president of Hussman Investment Trust:

"As for agricultural commodities, what we are observing is probably not a Malthusian breakpoint, but what I'd call “speculative hoarding.” Essentially, as the prices of commodities rise, particularly in developing nations, there is a tendency to save in the form of real goods. We've observed this historically in various countries as hoarding of every form of physical output, even spoons and other household items. ...

In effect, we are observing a version of tulip-mania with foodstuffs. I would expect that prices will reach a speculative peak, probably within a few months, and then most probably plummet with very little in the way of relief rallies. That is a fairly predictable dynamic once commodity price movements reach the parabolic stage that they have entered lately. Still, it's not clear how high that parabola will ascend, because as the slope goes vertical, small differences in the exact point of the bust will lead to substantial differences in the price at the high. But the world has more arable land and more capacity to bring it into use within months and years than should cause near-term concern about a Malthusian breakpoint."

There are several problems with this analysis. For one thing, food prices have been increasing faster than inflation since 2000, and have really skyrocketed since 2004 -- but any evidence of speculators or hoarding has only surfaced within the last year. Furthermore, food stocks and inventories have been going down every year.

But a more important flaw is the reasoning that there's plenty of "arable land" that can be brought into use. There's much more to the problem than the single dimension of arable land.

We'll come back to this, but first, some people are calling for a new "Green Revolution" to repeat the success of the Green Revolution that was launced by the Rockefeller Foundation in 1948, and which revolutioned agriculture in India and other countries in the 1960s.

Just reading the above paragraph, you can see what an unrealistic idea that was. It took 20 years to implement that last Green Revolution. The current emergency may cause an explosion in less than 20 weeks.

The new Green Revolution is supposed to target Africa. At the UN conference, World Bank president Robert Zoellick responded to the calls for a new Green Revolution:


Robert Zoellick, World Bank president <font size=-2>(Source: BBC)</font>
Robert Zoellick, World Bank president (Source: BBC)

"[W]hile one talks about a green revolution for Africa, one has to distinguish it from the green revolution in South Asia [of the 1960s] because the circumstances are different. So it really has to focus all along the value chain: property rights; seeds; fertilizers; irrigation systems; markets; roads, so people can be able to get their food to markets. And that’s [where we're in] the process of working with FAO and IFAD and others."

Now we can get back to Hussman's argument about "arable land." That's only a small part of the problem. Zoellick has listed a number of problems that have to be solved before the food crisis can be resolved in Africa.

Solving all of these problems would require the coordination of many countries and agencies, in a world where governments of one country after another are becoming increasingly paralyzed.

Once again, there isn't a snowflake's chance in hell that this new "Green Revolution" program will be put into effect.

I have mixed emotions about Hussman's argument that food prices are going to fall when the commodities bubble bursts, because it belongs in the "be careful what you wish for" category.


Shanty town in Mumbai (Bombay) India <font size=-2>(Source: BBC)</font>
Shanty town in Mumbai (Bombay) India (Source: BBC)

The prices of wheat, rice, and other staples WILL fall from their high bubble prices -- but only as part of the general deflationary spiral that the world will be facing.

At that point, however, many people in the world will starve, because food distribution systems will collapse in many parts of the world.

The picture above shows a shanty town in Mumbai (Bombay) India. There are probably thousands of these around the world today, many of them packed into cities of millions of people, with no local farmland. The collapse of the commodities bubble will mean that food prices will collapse, but the deflationary spiral will mean that food distribution systems that normally deliver food to shanty towns like this one will not be in operation. (30-Apr-08) Permanent Link
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Yasser Arafat in 2002: "We used to call Jews our cousins"

In an interview replayed on CNN on Sunday, originally broadcast on May 12, 2002, the late Palestinian leader Yasser Arafat expressed great affection for the Jews:


Yasser Arafat, May 12, 2002 <font face=Arial size=-2>(Source: CNN)</font>
Yasser Arafat, May 12, 2002 (Source: CNN)

"When I was a small boy, I used to play side by side -- I was living with my uncle in Jerusalem, my uncle Aria (ph), and I used to go -- as a small boy to play with the Jews in the Jewish quarter, and they used to come to play with me in my area. You forgot this? I don't forget. I was a small boy, but it's still in my mind. Historically, we were living together. We never -- do you know that until now we don't call them Jews? Do you know what we call them? Our cousins. Still, it is a popular pronounce (ph). We never say Jews. We say he is one of our cousins. Because historically, we are cousins."

Western governments considered Yasser Arafat to be a terrorist.

Was Arafat playing to the cameras? Probably.

But were Arafat's emotions genuine? I believe so.

Arafat was born in 1930, so when he talks about playing with Jews as a small boy, he's talking about something like 1935. That was long before WW II, and long before the partitioning of Palestine.

In fact, Jews and Arabs did get along for centuries. Things began to change because of anti-Semitism in Russia and Europe that caused Jewish migration to the Palestine area. The migration turned into a flood in the 1930s, when Hitler came to power.

The violence began with rock-throwing, and only became full-scale genocidal warfare between Arabs and Jews when Palestine was partitioned and the state of Israel was created in 1948.

Arafat lived survived that horrible war and, like almost all survivors of generational Crisis wars, vowed that he would do anything possible to make sure that nothing like that ever happens again. The same was true of Ariel Sharon, Israel's Prime Minister and Arafat's counterpart.

A year after the interview, on May 1, 2003, the Mideast Roadmap to Peace was announced by the Bush administration and other Western governments. It called for side-by-side Jewish and Palestinian states by 2005. Obviously that never happened.

When the plan was announced, I wrote the following:

"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.)"

Seeing this old Arafat interview again brings back memories of what was happening in 2003. The West was furious at Arafat, blaming him for preventing blocking any peace plan from being implemented. In those days, the common wisdom was that when Arafat was gone from the scene, then a peace plan would go forward.

From the point of view of Generational Dynamics, that's total nonsense. Arafat wasn't blocking a peace plan. Arafat was keeping the younger Palestinian generations from exploding. Yes, Arafat was a terrorist, but from his point of view, an occasional terrorist act was the lesser evil, compared to a full-scale genocidal war, refighting the war of the late 1940s.


<i>New York Post</i> front page, 11-Nov-2004
New York Post front page, 11-Nov-2004

Arafat died in November, 2004, and the West rejoiced, believing that the Roadmap to Peace could finally be implemented. Instead, things have gone from bad to worse in the Palestinian territories, especially Gaza. Violent deaths are a daily occurrence, as are missiles launched from Gaza into Israeli towns.

Few people today would doubt that the Mideast is sliding toward a major war. The death of Yasser Arafat, the man who called Jews his "cousins," had exactly the opposite effect that Western governments expected. That's why I wrote in my May 1, 2003, article quoted above: "Be careful what you wish for." (29-Apr-08) Permanent Link
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Brilliant Nobel Prize winners in Economics blame credit bubble on "the news"

Meanwhile, the deflationary spiral is in progress, but hyperinflation is not.

On Friday morning, I listened on CNBC to a discussion with two Nobel Prize winners in Economics give their explanations of what went wrong with financial instruments that led to the credit bubble that's now bursting.


Robert Engle and Joseph Stiglitz, Nobel Prize winners in Economics <font face=Arial size=-2>(Source: CNBC)</font>
Robert Engle and Joseph Stiglitz, Nobel Prize winners in Economics (Source: CNBC)

The two were Robert Engle, 2003 Nobel Prize Winner in Economics, and Joseph Stiglitz, 2001 Nobel Prize Winner in Economics.

According to the program discussion, it was Engle who developed the mathematical models that were used by the financial engineers to develop the CDOs and related instruments that created the credit bubble.

The credit bubble created tens of trillions of dollars of securities (CDOs or collateralized debt obligations), backed by mortgage-based securities, on the assumption that the housing bubble would continue forever. The math behind these CDOs was based on numerous false assumptions, as I explained in "A primer on financial engineering and structured finance." (In addition, the same mindset that created the fraudulent CDOs also invented the hare-brained auction rate securities scheme, which has created in more trillions of dollars in worthless securities.)

And so, the issue under discussion was whether it was Engle's model that's to blame for the credit bubble and the current financial crisis.

This question was addressed to Stiglitz: "Is it a case of financial innovation gone awry? Is it a matter that regulators couldn't keep up with it fast enough? Was the model a force for good, and just misused?" Stiglitz' reply:

"I think part of the problem is that when they studied these models in business schools, they only got part of the message. ... They got some of the message, but not the whole story.

One of the things that's really quite striking is that they believed that they were creating new financial instruments, these new financial instruments were going to change the world, and yet, in estimating the risk, they had to use previous data, data from the world before they changed it.

So there was inherently a logical inconsistency in what they were doing."

This is a point that I've made numerous times, and discussed at length two years ago in "System Dynamics and the Failure of Macroeconomics Theory."

Stiglitz is saying that in this one case, economists tried to apply old financial models to new financial instruments, and the assumptions in the old models failed.

When I discuss this concept, however, I state it differently: In EVERY case, economists' macroeconomics models are always wrong, because they're ALWAYS based on old data, and the models don't take into account generational changes. By modifying the models to incorporate System Dynamics as applied to generational flow, the models would be much more accurate.

Stiglitz went on to discuss the issue of "correlative risk." This is also an issue that I touched on in "A primer on financial engineering and structured finance." The problem, in a nutshell, is that if everyone is using exactly the same model, doing exactly the same things, then one person making a mistake means that EVERYONE is making the same mistakes. In that case, mistakes correlate with one another, rather than occurring randomly:

"One of the problems of that was that they were all using similar models, that was creating systemic correlative risk, and they underestimated the degree of the correlation.

So for example, big events like housing prices going down -- they felt you had to diversify, because you only own -- you had a portfolio of 1000 houses. How could 1000 houses all have problems?

Well, the answer is, if the housing market collapsed, if unemployment increases, if interest rates rise, a very large fraction of all of these are going to have problems.

They simply didn't take into account these kinds of correlative risk, and the extent to which these correlations might actually be increased by the fact that they were all using similar models."

Now what does this guy think -- that we're all idiots - which is what we'd have to be to believe this drivel.

He's saying that these brilliant Gen-X financial engineers all went to business school, all learned these complex mathematical models, then went into the financial industry and applied these models, creating CDOs and other complex financial instruments.

But ohhhhh, they forgot that unemployment might increase!! Duh!!

And ohhhhh, they forgot that interest rates might rise!! Duh!!

And ohhhhh, they forgot that the housing bubble might burst!! Duh!!

Does Nobel Prize winner Stiglitz really believe this? Does he really think the rest of us believe it?

At that point, the following question was posed to Professor Engle: "If everyone is using the same model, does that make it a less effective model? What do you think to that?" Here's his response:

"I think the main driver of volatility and correlation is actually the news. It's not the way we use the instruments - I think that's important, but it's a secondary effect -- and what really happened in this case to make the correlation so high across the regions of the country, as Joe just described, is that it was a macroeconomic event. That is, the economy slowed down."

Ohhh, now I get it. It's "the news" that's the problem. These financial geniuses created these CDOs and other financial instruments.

But ohhhhh, they forgot that the economy might slow down!! Duh!!

This is the kind of airheaded discussion that's become the norm among today's economists, even Nobel Prize winning economics. It's total gibberish, but that's OK by today's standards.

It's easy to see why Stiglitz and Engle are puzzled. It's the unspoken question in all of these discussions: How could massive, pervasive credit fraud have occurred throughout the entire financial and real estate industry? How could EVERYBODY in these industries, from top to bottom, all be so willing to practice such corruption and fraud, screwing investors and the general public for their own gain?

This is the question that they don't even try to answer.

Just as they never try to answer why the dot-com bubble occurred in the late 1990s. Why did the dot-com bubble occur at all, and why did it begin in 1995 rather than some other year, say 1985 or 2005? They don't try to answer that, even though the answer is completely obvious: 1995 was the time when all the survivors of the Great Depression were replaced, in senior management positions, with people who were born after the Great Depression. It's as simple as that, but none of the great geniuses even think of it.

And now, what about the credit bubble? Stiglitz and Engle are trying to figure out how the corruption and fraud could have been so pervasive, and why no regulators stopped it. So they had to grasp at something that affects everything, and they picked interest rates and unemployment. Well then, why didn't the same thing happen the last time interest rates rose and unemployment rose?

It makes no sense at all, but they never consider the obvious solution: There is one thing that's changed for every company of every type to people at every level, and that's generational changes. That's the one and only explanation that even makes sense, and yet it's never even suggested or discussed. Apparently it's too abstract for even Nobel Prize winners to grasp.

Surging defaults in CDOs

Also on Friday, CNBC economist Steve Lieseman presented some data about the surging default rate for CDOs. In addition to be very significant by itself, this data refutes the claims of Stiglitz and Engle.

If you've been following the financial news or this web site for the last year, then you know that many financial institutions -- Merrill Lynch, Citibank, Bear Stearns, etc. -- have been "writing down" assets in their portfolio. This means that these securities were on the books at an inflated estimated nominal value computed by a computer model. It had to be done this way because there was no market in which to buy and sell these assets. As the housing bubble began to burst, financial institutions -- completely against their will -- were forced to re-value or "write down" these securities more realistically.

The original inflated values were set by computer models that assumed that the CDOs were AAA rated, meaning that the probability of default is much higher than assumed. As the probability of default rose, the CDOs become worth less.

However, the writedowns were made without the CDOs actually defaulting. The re-valuing was done based on new assumptions that the CDOs had a much greater chance of defaulting than previously assumed.

Well now the CDOs are starting to default -- in high volume.

According to the data presented by Lieseman:

Lieseman somehow concluded that this was "good news" (everything is always "good news" on CNBC), but in fact these figures not only show that Stiglitz and Engle are wrong, they also show that the most cynical explanation is the correct one.

The innocence explanation that banks are giving for creating worthless CDOs and selling them to people is that they didn't understand that they were going to be worthless. Stiglitz and Engle supported this innocence explanation by saying that these poor financial engineers couldn't possibly have foreseen such things as the bursting of the housing bubble or a rise in interest rates.

But by 2007, it was perfectly clear that the housing bubble had burst, and that interest rates were rising. So by Stiglitz' and Engle's reasoning, the financial engineers should immediately have realized that their models were wrong, and the banks should have immediately stopped creating and selling CDOs.

But that's not what happened. What happened, as I've said before and has been confirmed by these new figures, is that the banks continued to create these faulty CDOs and sell them to investors.

In other words, putting Stiglitz' and Engle's reasoning together with Lieseman's figures, the only possible explanation is massive fraud by the banks.

And that doesn't surprise me at all, and shouldn't surprise any regular reader of this web site.

Recently, in the article "FBI joins SEC into wide-ranging investigation into mortgage-lending industry." we provided a lengthy list of all the actors in the housing and credit bubbles, and the kinds of fraud they perpetrated at all levels. It ran from homeowners who lied on their applications to brokers who lied about home values to lenders who adopted "predatory" lending practices to investment banks that created fraudulent CDOs and other mortgage-backed securities to ratings agencies that gave them AAA ratings in return for fat fees to "monoline" bond insurers that insured them for fat fees. The list is almost endless.

What Lieseman's figures show is that all these forms of fraud actually INCREASED as time went on. I've said this before, but Lieseman's figures prove it.

Economists like Stiglitz and Engle look at this massive, pervasive fraud, and have NO IDEA what's going on. How could so many people been involved? They have no explanation, and they grasp at straws.

I've given a complete explanation of the credit bubble in generational terms, showing how the Boomers first caused the dot-com bubble, and then how the Boomer/Gen-X interaction caused the credit bubble and the massive fraud. That's the only explanation that actually makes sense, unlike the ones given by Stiglitz and Engle.

And what I've also said before is that the stench is sickening. We're talking about huge numbers of people who defrauded poor people, investors and the general public for their own personal gain. We're talking about a financial industry culture, led by Boomers who were willing to overlook fraud for personal gain, and perpetrated by nihilistic, destructive, and self-destructive Generation-Xers who were willing to perpetrate any fraud, screw any person or group of people, for their own personal gain.

It's no wonder that Stiglitz and Engle and other mainstream economists are spouting nonsense to explain what happened. Even if they know what happened, they can't admit it because they'd be admitting their own complicity.

Credibility and earnings

The current financial crisis has gone through several stages. First it was the finance and real estate industries defrauding investors and the public, with analysts and journalists saying that we're in a new modern world where prosperity would last forever.

Then, when the credit crisis began in August, there was a swing to risk aversion, as asset writedowns showed that financial institutions had been consistently lying to investors and the public.

Since then, we've had commercial banks, investment banks, ratings agencies, "monoline" insurers, analysts, journalists and government officials and regulators lying about what was coming.

The cycle has repeated over and over: Someone would say that everything was all right, and then the next day some earnings figures or other data would prove they'd been lying. Then they'd say that everything was all right, and the data would get even worse. And the cycle would repeat.

What's happened in the last couple of months is really ugly: The lying gets worse each time the news gets worse. Even worse than that is that investors are adopting the attitude that the news is so bad that it can't get any worse, and so it has to get better.

These people should have no credibility left at all, after everything they've said has turned out to be wrong, time after time. And yet, they seem to believe and support one another until the data proves them wrong. It's a variation of "honor among thieves."

An obvious example is the table of corporate earnings estimates that I've been posting, based on figures from CNBC Earnings Central supplied by Thomson Reuters. Here's the latest version:

  Date    1Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct 23:             +10.0%
  Jan  1:              +5.7%
  Feb  6:              +2.6%
  Feb 29:              -1.1%
  Mar  7:              -4.3%
  Mar 14:              -7.8%
  Mar 21:              -7.9%
  Mar 28:              -9.3%
  Apr  4:             -12.2%
  Apr 11:             -14.1%
  Apr 18:             -14.6%
  Apr 25:             -14.1%

On January 1, the beginning of the first quarter, analysts estimate earnings growth of 5.7%. Those estimates have fallen almost every week since then, apparently leveling off around -14-15%. Don't be surprised if this estimate falls even further.

How can anyone possibly believe anything that analysts at Thomson Reuters, or ANY analysts, say at this point? And yet, investors appear to be mesmerized by estimates that earnings will grow 25-50% in the third and fourth quarters. How dumb do they have to be to believe that?

The situation that we have today is that the same financial managers, financial engineers, analysts, regulators and journalists who created and supported the housing and credit bubbles, through either their own stupidity or their own dishonesty or their own corruption or their own criminality are now continuing with exactly the same stupidity, dishonesty, corruption and criminality, because to do otherwise would be to admit to their own part in the growing financial crisis.

Amid all this stench of corruption, these people should have no credibility left whatsoever. Instead, they cling to credibility by supporting one another's corruption, watching as the news gets worse and worse, hoping for the day when they'll find someone besides themselves to take all the blame.

Credibility and asset writedowns

Are asset writedowns almost at an end? The banks, analysts and journalists are saying that they are, but they haven't gotten this right since the beginning, so we have to assume that they're being stupid, dishonest or corrupt, as they have been all along.

In fact, some figures published this week indicate that there's still a long way to go.

Let's begin with a table of all the asset writedowns so far (as of April 1) -- and keep in mind that in each case, the institution had said just a few days earlier that everything was perfectly fine:

    Firm                    Writedown     Credit Loss      Total
    ----------------------- ---------     -----------      -----
    UBS                       38                            38
    Merrill Lynch             25.1                          25.1
    Citigroup                 21.4            2.5           23.9
    HSBC                       3              9.4           12.4
    Morgan Stanley            11.7                          11.7
    IKB Deutsche               9                             9
    Bank of America            7.3            0.9            8.2
    Deutsche Bank              7.4                           7.4
    Credit Agricole            6.5                           6.5
    Credit Suisse              6.3                           6.3
    Washington Mutual          0.3            5.5            5.8
    JPMorgan Chase             2.9            2.1            5
    Wachovia                   2.9            2              4.9
    Canadian Imperial (CIBC)   4                             4
    Societe Generale           3.8                           3.8
    Mizuho Financial Group     3.4                           3.4
    Lehman Brothers            3.3                           3.3
    Barclays                   3.2                           3.2
    Royal Bank of Scotland     3.1                           3.1
    Goldman Sachs              3                             3
    Dresdner                   2.7                           2.7
    Bear Stearns               2.6                           2.6
    ABN Amro                   2.4                           2.4
    Fortis                     2.3                           2.3
    Natixis                    1.9                           1.9
    HSH Nordbank               1.7                           1.7
    Wells Fargo                0.3            1.4            1.7
    BNP Paribas                1.3            0.3            1.6
    DZ Bank                    1.5                           1.5
    National City              0.4            1              1.4
    Bank of China              1.3                           1.3
    Bayerische Landesbank      1.3                           1.3
    Caisse d'Epargne           1.3                           1.3
    LB Baden-Wuerttemberg      1.3                           1.3
    Nomura Holdings            1                             1
    Sumitomo Mitsui            1                             1
    Gulf International         1                             1
    European banks not         8.4                           8.4
    listed above
    Asian banks not            4              0.7            4.7
    listed above
    Canadian banks             2.4            0.1            2.5
    excluding CIBC
    ----------------------- ---------     -----------      -----
    TOTALS                    206            25.8          231.8

And so, that's a total of $232 billion in asset writedowns, as of April 1.

What should we make of this list? Is this the end of the writedowns? Are institutions finally being honest, and confessing to everything, as investors seem to believe?

Actually, there's every reason to believe the opposite:

And so there's no motivation whatsoever to hurry up and write down assets, and there are HUGE motivations NOT to do so unless absolutely forced to. So there's ABSOLUTELY NO REASON to believe that the asset writedowns are anywhere close to completion.

Also, notice the following peculiarity: Recall from the figures above the Steve Lieseman provided that $179 billion in CDOs have ALREADY DEFAULTED. As Lieseman discussed when he presented these figures on CNBC, there's absolutely no way to correlate the defaulted CDOs with the writedowns in the list above. The banks are simply keeping all that information top secret. If $179 billion have already defaulted, you can be sure that there will be a lot more than $232 billion in writedowns to come.

One question that we might ask ourselves is this: How much are the assets in institution portfolios that MIGHT have to be written down in the future? It turns out that we know at least some of the answer to that question, thanks to new data that was posted last week.

But first we have to review some definitions. Last October, I described a new accounting rule, FASB Statement 157. This rule describes three categories of assets that an institution might have in its portfolios, and three different methods for determining their market values. Here are the three categories:

Most CDOs and asset-backed securities are in the Level-2 category, and some are Level-3.

What's been happening since August is that as Level-2 assets either default or get written down, a chain reaction is created. These writedowns and defaults become "observable market data," and so by the "mark-to-matrix" rules, similar securities held by the same institution or other institutions must be written to comparable prices.

The new FASB Statement 157 accounting rules became effective on November 15, and now, five months later, the size of the assets in these categories has become public for some major institutions.

Bennet Sedacca on the Minyanville web site posted the following table of Level-2 and Level-3 assets for the eight largest holders in the U.S.:

    Institution                   Level 2         Level 3
    and ticker                    Assets          Assets
    -------------------------   --------------   ------------
    1) JP Morgan (JPM)          1,093,059,020     71,290,000
    2) Citibank (C)               933,639,030    133,435,000
    3) Bank of America (BAC)      781,805,030     31,470,000
    4) Merrill Lynch (MER)        768,073,010     41,449,000
    5) Goldman Sachs (GS)         620,985,970     96,386,000
    6) Bear Stearns (BSC)         332,979,010     37,350,000
    7) Morgan Stanley (MS)        304,052,010     78,168,000
    8) Lehman Brothers (LEH)      199,830,990     42,508,000
    -------------------------   --------------   ------------
    Totals                      5,034,424,070    460,766,000

Putting all this together, here's what we know:

You can make your own judgment, but my judgment is that hundreds of billions of dollars or trillions of dollars of additional writedowns are being hidden by financial institutions, either inadvertently, or purposely, in order to mislead investors and the public.

And judging from the reactions of investors and the financial press, who are saying that the worst is over, the financial institutions' mendacity is being rewarded.

Credit default swaps (CDSs) and counterparty risk

Little is known by anybody about the real structure of all of the the $700 trillion worth of credit derivatives in financial portfolios of institutions around the world, since they're totally unregulated.

One segment of those credit derivatives, the credit default swaps (CDSs) segment, totalling $45 trillion, is becoming better understood.

In particular, it's becoming clearer that the marketplace is creating long "chains" of CDSs that pose serious systemic risk to the global economy.

In general terms, here's how these chains are created:

Now you may think that the above example is fanciful, but as I understand what's going on, it is not fanciful. In fact, it's become standard practice among investment banks and hedge funds to offload risk in exactly this way. Hedge funds in particular have created tens of trillions of dollars of CDSs in order to offload risk with one another. The "monoline" bond insurers have acted as counterparties to many of these CDSs, in return for fat fees.

Now you can see the meaning of the phrase "counterparty risk." I've signed a CDS with you, and if my CDOs default, I'll expect you to pay me $1 million.

You think you're OK, even if you don't have $1 million to spare, because you've signed a CDS with another counterparty, B, who'll have to pay you the $1 million that you have to pay me. The counterparty chain goes through C, D, E, and so forth and, like any chain, it's only as strong as its weakest link.

With tens of trillions of dollars CDSs intertwined through investment funds and hedge funds, there is a great deal of fear that any large bankruptcy will cause a chain reaction that will cause multiple bankruptcies.

It was exactly this kind of CDS counterparty chain reaction risk that Fed Chairman Ben Bernanke was talking about when he testified before Congress to explain why the Fed saved Bear Steans from bankruptcy in March. Bear Stearns was going to go bankrupt within 24 hours, which would have caused a systemic calamity to the global economy.

At the end of the most interesting part of the testimony, Senator Bunning asked, "What's going to happen if a Merrill or a Lehman or someone like that is next?" He never got an answer to that question, but there's no doubt that the correct answer is a financial calamity.

Inflation or deflation?

I'm getting one or two questions each week from web site readers either asking about or disagreeing with my discussion of deflation and the deflationary spiral we're headed for.

Here's a recent message from a web site reader:

"I do read a lot of other blogs and sites regarding economic news. One that I just read was discussing the 'deflation or inflation' question. It basically forcasts inflation.

Now... I think that you are of the opinion that a deflationary cycle is coming. The article above suggests that inflation will happen becasue currencies are no longer tied to gold and so governments can just print more and more money.

There certainly seems to be two camps of thought on this issue, both camps having there fair share of people without vested or biased interests. I'm confused as to how these two camps could have such different views."

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What's coming next: Understanding the deflationary spiral: Why are the dollar and the yen getting stronger, while the euro is getting weaker?... (27-Oct-2008)
Roubini: The situation is "sheer panic," as hundreds of hedge funds are going bust: Policy makers may need to close markets for one or two weeks.... (24-Oct-2008)
There's never before been a day like this on Wall Street.: Possible exception: One of the days just before or after the 1929 crash.... (11-Oct-2008)
Ben Bernanke's Great Historic Experiment is at the brink: Desperation sets in as credit markets continue to seize up.... (25-Sep-2008)
Government promises to buy bad debt to end the credit crisis: Stock markets stage huge comeback as giddy investors pile in.... (19-Sep-2008)
Web site readers express sadness, anxiety and anger: It's beginning to sink in.... (18-Sep-2008)
Another stunning and historic bailout: Fannie Mae and Freddie Mac: Giddy investors are popping the champagne corks.... (9-Sep-2008)
Long-term negative market trends asserting themselves strongly: Stock and commodities prices plummet as worldwide foreclosures and recessions worsen.... (5-Sep-2008)
Money supply contracts dramatically, as credit markets continue to seize up.: Former IMF chief: Worst of global financial crisis is yet to come.... (24-Aug-2008)
As commodities plummet worldwide, the meaning is unclear.: We speculate on some possibilities.... (11-Aug-2008)
Alan Greenspan calls this a "once in a century" liquidity crisis.: Says that the "big surprise" is the "impressive" American economy... (3-Aug-2008)
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Pundits and analysts are baffled by the market's performance: They have some interesting fantasies, as well.... (10-Jul-2008)
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WSJ's page one story on Bernanke's Princeton "Bubble Laboratory" is almost incoherent: So is Thursday's speech on bubbles by Fed Governor Frederic S. Mishkin.... (18-May-2008)
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Questions and answers about the "credit crunch": What's going on, and what you can do about it.... (6-Dec-07)
Understanding deflation: Why there's less money in the world today than a month ago.: As the markets continue to fall, the Fed is increasingly in a big bind.... (10-Sep-07)
Bernanke's historic experiment takes center stage: An assessment of where we are and where we're going.... (27-Aug-07)
Ben Bernanke's Great Historic Experiment: Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs.... (18-Aug-07)
Japan's real estate crash may finally end after 16 years: To see where America is going, look what happened in Japan.... (20-Feb-07)
This week's financial data points to trend back toward deflation.: Several inflationary indicators are down for June... (17-Jul-04)

So I'll summarize the discussion again here, and leave anyone wanting more to read the "related articles" in the sidebar. Also, although mainstream economists talk about nothing but inflation, I would point out that I've been right a lot more often than mainstream economists in the last six years.

First, let's discuss the "gold standard" which, until 1971, pegged the value of gold at $35 per ounce. The argument being made by some (but not by Bernanke and other policy makers) is that the government could not "print money" in the 1930s because the dollar was pegged to gold, but could "print money" as much as it wanted today, making the dollar worthless, and pushing the economy into hyperinflation. Supporters of this view also use the term "fiat currency" to describe the dollar today, not pegged to gold, as opposed to the dollar before 1971.

This argument about the gold standard is completely irrelevant to the discussion in just about every possible way:

With regard to gold, I'm going to repeat a warning that I've posted several times before: The price of gold has been in the $300-500 per ounce range since the 1970s, except for the bubble in the early 1980s and the bubble going on today. The price of gold will almost certainly fall to the $300-500 range again, once the bubble bursts, even if it spikes briefly upward again. Gold is way overpriced today, and represents a very poor investment for most people.

As for the potential of hyperinflation, just consider the figures that have been given in this article: Hundreds of trillions of dollars in credit derivatives in institutional portfolios around the world; tens of trillions in credit default swaps (CDSs); over $5 trillion in CDOs and other "Level-2/3" assets. Add in at least $5 trillion as the size of the housing bubble, and additional trillions of dollars for bubbles in consumer debt.

All of that money is disappearing, as the credit bubble implodes. Are CDSs "real" money? Yes they are, in a very real sense. It's true that you can't go into the grocery story and purchase a quart of milk with a CDS, but you CAN (or at least COULD until last August) use those CDSs to purchase stock shares or other marketable securities.

When the Fed saved Bear Stearns from bankruptcy, it was not by "printing money." In fact, all the various actions taken by the Fed in recent weeks have been to permit commercial and investment banks to exchange their worthless CDOs for Treasury bills.

When a bank thus gets rid of its CDOs, it no longer has to write them down according to mark-to-market rules. Those worthless CDOs are then in the Fed's portfolio, where they will sit until either the bank has to take them back, or until the Fed can find another way to get rid of them.

So the real danger is not hyperinflation. The real danger is that the Fed itself will go bankrupt, when it becomes evident that those CDOs really are near-worthless.

And that's certain to happen, according to an analysis by Oppenheimer analyst Meredith Whitney. Here's what she said, describing the actions of commercial banks:

"[T]hese banks have got themselves into trouble, are going to get themselves into trouble prospectively, because they refuse to sell these assets, because they think the market is bid too low.

Well the problem is that each month that they wait, the asset values go lower, and then when the ratings agencies downgrade these assets, they're required to carry even more capital against those assets. ...

There are a couple of things that go on. So you have people that refuse to sell assets.... So if banks don't want to sell these assets, the longer they wait to sell these assets, the values decline.

But then when, all of a sudden, banks decide TO sell all these assets, there'll be a supply jam on the market driving prices down even lower, so there'll be more write downs. And ultimately, I think these financials will sell assets at well below today's market prices."

Whitney said that a month ago, and we can see that her predictions about falling asset prices have been coming true. This is indicated by the surging defaults in CDOs that we discussed earlier.

But now many of those near-worthless assets are in the Fed's portfolio, rather than in the banks' portfolios. So the real danger is not some kind of hyperinflation. The real danger is the total collapse and bankruptcy of the Federal Reserve, as the value of its assets become worthless. This will create a massive chain reaction, resulting in the collapse of tens of trillions of dollars worth of CDOs, CDSs, auction rate securities, and other near-worthless securities, the detritus of the burst credit bubble.

As I've been saying for years, the credit bubble has to burst. It's already leaking, and it's leaking faster and faster. At some point, the chain reaction just described will begin. This won't cause hyperinflation, because the Fed has only a tiny amount of money available to it, compared to the massive money losses that will occur. Those massive losses will create the deflationary spiral that I've described.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (27-Apr-08) Permanent Link
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Reverend Jeremiah Wright defends his anti-Americanism.

Appearing on PBS on "Bill Moyers' Journal," Reverend Jeremiah A. Wright Jr. was given a full hour to explain his numerous well-publicized anti-American remarks, including his accusations that America is rooted in terrorism, that the 9/11 attacks were "the chickens coming home to roost" for America's crimes, and that the US government created the Aids/Hiv virus as a weapon to exterminate blacks.

The one-hour interview appeared on PBS's Bill Moyers' Journal on Friday evening, and is being repeated during the next few days.

Listening to Wright, I was reminded how easy it is for hate-filled racist bigots to have no trouble cherry-picking "facts" to justify their prejudices. Hitler never had any trouble justifying his hatred of Jews, the Ku Klux Klan never had any trouble justifying their hatred of blacks, and Wright had no trouble justifying his hatred of America. These people are all of the same cloth.

Whenever I hear Reverend Wright screaming "God damn America! God damn America! God damn America!", I feel the need to take a shower. However, that option isn't always available.

So for those of you who feel the same way, I offer you the following video of Canadian singer Celine Dion to serve as a very effective antidote:

(27-Apr-08) Permanent Link
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More e-mail troubles - please use alternate gmail address.

Web.com (Interland) is bouncing e-mail messages again.

If you've sent me an email message in the last week, then it's possible that I haven't received it.

Right at this moment (Friday morning) all e-mail messages to generationaldynamics.com are being bounced, because of problems on their systems. This apparently has happened off and on for the last week.

If you send me an e-mail message, please copy it to the following gmail account that I've set up: jxenakis123@gmail.com . That way, I'll get it one way or the other.

Also, you can use one of the "Comment" forms, such as the one on the right.

(25-Apr-08) Permanent Link
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Food rationing comes to the United States

After years of price rises, mainstream media is finally recognizing there's a problem.

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It has been a mystery to me for years how the world could possibly be so oblivious to the growing problem of food scarcity and higher food prices. I first wrote about this in 2004 in "Green revolution vs the Malthus effect," and the mystery has been growing since then as the problem has gotten worse every year. Food prices have been growing faster than inflation since 2000, and started spiking rapidly by 2007.

The "Malthus Effect" is a term that I coined for the phenomenon that population grows faster than the food supply, resulting in genocidal wars. Thomas Roberts Malthus first wrote about this in 1798, but he made a mistake in concluding that food scarcity and rising food prices would cause famine. What I call the "Malthus effect" corrects this error by concluding that food scarcity and rising food prices would cause genocidal war, as populations compete for scarce resources.

It's somewhat of a cultural breakthrough that this past week, BBC, CNN, CNBC and other major media channels finally devoted a great deal of air time to the worldwide food crisis.

What really has caught everyone's attention is that major warehouse clubs Sam's Club and Costco are in the process of limiting sales of rice, and considering the same for flour and for some oils.

The motivation for rationing is that large purchasers, especially restaurant chains, are hoarding large quantities of rice because the price keeps on increasing. The world price of rice has more than doubled in the last year, and increased 47% just this year. Prices are expected to continue increasing at least until 2009. And so large purchasers are hoarding to save money, resulting in rationing.

In fact, food scarcity and food prices are creating destabilization all of the world. Haiti's government fell last week because of rising food prices, and rice-producing countries, including China, India, Vietnam and Egypt, have been limiting or forbidding exports.

The world's largest rice exporter, Thailand, is also considering export bans to prevent internal shortages. The World bank is warning that if Thailand reduces exports, then panic buying may be triggered throughout Asia.

World Vision International, which provides food relief in 35 countries, said it can no longer provide rations to 1.5 million of the poor people it fed last year because of soaring costs.

This is affecting everyone in the world, creating pools of hunger and starvation in many different places.

If the situation is so bad that the United States, the best-fed country in the world, is forced to resort to food rationing, then you can just imagine what must be happening in the developing world.

It's only a matter of time before one of those pools of people turns into a hungry mob, and then an angry mob.

Reggae isn't my favorite kind of music, but this video of Bob Marley's "Them Belly Full" is really great, and carries an important message:

    Them belly full but we hungry
    A hungry mob is an angry mob
    A rain a fall but the dirt it tough
    A yot a yook but the yood no 'nough

You're gonna dance to Jah music, dance We're gonna dance to Jah music, dance Forget your troubles and dance Forget your sorrows and dance Forget your sickness and dance Forget your weakness and dance

Cost of living get so high Rich and poor they start to cry Now the weak must get strong They say, oh what a tribulation

Them belly full but we hungry A hungry mob is an angry mob A rain a fall but the dirt it tough A pot a yook but the yood no 'nough

We're gonna chuck to Jah music, chuckin' We're gonna chuck to Jah music, chuckin' Chuckin', chuckin', chuckin', chuckin'

Belly full but them hungry A hungry mob is an angry mob A rain a fall but the dirt it tough A pot a cook but the food no 'nough A hungry man is an angry man A rain a fall but the dirt it tough A pot a yook but the yood no 'nough A rain a fall but the dirt it tough A pot a cook but the yood no 'nough

(24-Apr-08) Permanent Link
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Putin angrily denies divorce rumors and shuts down newspaper reporting them

He denies the 'erotic fantasy' reports of an affair with Alina Kabaeva


Russian journalist Natalia Melikova asked the sensitive question about Putin and Kabaeva.  At bottom, Berlusconi responds with a gesture pretending to shoot Melikova, with Putin looking on. <font face=Arial size=-2>(Source: Telegraph)</font>
Russian journalist Natalia Melikova asked the sensitive question about Putin and Kabaeva. At bottom, Berlusconi responds with a gesture pretending to shoot Melikova, with Putin looking on. (Source: Telegraph)

The Moscow newspaper Moskovski Korrespondent was forced to shut down, and its editor, Grigori Nekhoroshev, was forced to resign, in retaliation for printing rumors that Putin had divorced his wife, and was going to marry rhythmical gymnast Alina Kabaeva, a superstar and gold medal winner at the 2004 Olympics in Athens. (See my article, "Vladimir Putin finds a way to retain power in Russia" for more details about the rumors.)

"Our director came to the newsroom and told us we were being shut down," said the shaken editor Nekhoroshev. "As far as the story is concerned I’ve full faith in my correspondents."

Several hours earlier, at a press conference in Sardinia with the Italian Prime Minister Silvio Berlusconi, Russian journalist Natalia Melikova asked Putin about the rumors.

Berlusconi immediately gestured at Melikova, pretending to be shooting her with a gun.

There's little doubt that Berlusconi was joking, but the joke isn't so funny when you consider that other Russian journalists who displeased the Kremlin ended up with bullets in them.

At the press conference, Putin derided the “snotty noses and erotic fantasies” of the journalists reporting the rumors, which he denied, saying: "There is not a word of truth in this story. Politicians live in glass houses, everyone wants to know how they live, but there are limits and there is a private life and these limits should be respected. ... Other publications of a similar nature have in the past mentioned similar stories about me and women entertainers and attractive young girls and it will come as no surprise to you that I don't like them."

Melikova reportedly was reduced to tears by the incident at the press conference, but later said, "I saw Berlusconi's gesture and I know he has a reputation as being a joker. I hope there are no consequences." I suspect that Melikova has learned her lesson.

But there were consequences for Moskovski Korrespondent, and its editor, as the paper was shut down just a few hours after the press conference. (23-Apr-08) Permanent Link
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China and Taiwan: Understanding two different war paradigms

None of Obama, Clinton or McCain have any idea of this.

Last month, in my article on Ma Ying-jeou's presidential victory in Taiwan, I quoted a BBC report by BBC correspondent Humphrey Hawksley claiming that China has decided that economic development with Taiwan is so important that "unification" of Taiwan with China has become irrelevant.

I was very critical of this view, and so I was extremely flattered last week to receive an e-mail message from Mr. Hawksley himself pointing out an IHT.com article in which he expands his thoughts in much greater detail:

"After decades as a flashpoint for war, the Taiwan-China conflict is, in effect, no more.

High-level conferences did not bring peace. Nor has one side battered the other into submission. Time, pragmatism and compromise produced a win-win formula that could serve as an example elsewhere - the Middle East, the Balkans, Tibet. It's already being replicated between the U.S. and China.

China and Taiwan have each become so irreplaceable to the global supply chain that the benefits of the status quo, coupled with increased living standards, far outweigh those of causing trouble.

The information-technology sector alone gives an idea of how easily a China-Taiwan conflict could paralyze world consumer markets. Between them, China and Taiwan control much of the computer Internet market.

On a wider scale, economic links between China and Taiwan continue to grow. More than 50,000 Taiwanese companies operate in China. Taiwanese overall investment there is at least $150 billion, with more from Taiwanese-owned offshore companies. China-Taiwan annual trade is more than $100 billion, and products of this alliance involve supply chains from dozens of other countries.

Add China's reliance on exports to the United States and its billions of dollars of U.S. debt, and the scenario of all this suddenly unraveling becomes unthinkable, conjuring up a Cold War comparison of a "mutually assured destruction" through economic instead of nuclear strikes. The difference is that bankers and economists, not generals, call the shots.

In recent years this economic reality has increasingly loomed over Chinese and American policymaking, paving the way for a permanent peace. "Beijing made a decision in the summer of 2002 that the economic development of China was more important than the unification of the motherland," explained Chong-pin Lin, president of the Foundation for International and Cross-Strait Studies. "And that was inter-related to another principle of placing cooperation with Washington higher than conflict with Washington." ...

For its part, the United States since 2003 has taken the side of China whenever Taiwan makes rumbling noises on the issue of independence. This inconsistency between America's claim to a global democratic mission and its warning to Taiwanese voters not to upset the Chinese apple cart is another example of the changing paradigm. "America is praising the people of Iraq for going to the polls yet at the same time condemning us for having a vote to express our desire to be part of the international community," notes Bi-khim Hsiao, international affairs spokesman for Taiwan's defeated Democratic Progressive Party. ...

The United States could eliminate this inconsistency by using the very model that it fostered - "China-Taiwan supply-chain diplomacy" - to motivate other conflict zones towards peace.

One crucial marker is the link between economic performance and political maturity. According to the Taiwan Institute of Economic Research, it was only possible to begin dismantling Taiwan's dictatorship in the mid-1980s when the per capita GDP had reached $5,000. David S. Hong, the president of the institute, suggests that China will not be ready for such a transformation until per capita GDP reaches $15,000, perhaps more than a generation from now. At present the GDP is about $2,000, against Taiwan's $17,000.

Both the Chinese government and Tibetan activists could learn from the Taiwan example. At present, decades of Chinese investment and economic growth in Tibet have had scant effect on Tibetans who cling to their culture and religion even if that means less material improvement. China, too, remains determined to preserve its control over Tibet no matter what the economic cost may be. It's a lose-lose situation. ...

Humphrey Hawksley is a BBC correspondent. His latest book "Security Breach," is due out in August. Reprinted with permission from YaleGlobal."

At its heart, this is the "war is bad for business" argument, which can be used to prove that no major war can ever occur -- until it does.

Practically every major war in history was conducted by belligerents that were doing business with each other.

For example, England and France have had robust commercial ties, ever since the French Normans and William the Conqueror conquered England in 1066. And yet, those commercial ties meant nothing in one major war after another.

The problem is that these major wars ("generational Crisis wars," as I refer to them) almost never make sense in retrospect. How could Japan have POSSIBLY decided to bomb Pearl Harbor, when the US was many times larger than Japan, and clearly would win the subsequent war? In the American civil war, how could the South POSSIBLY have decided to initiate war, when the North was three times larger than the South? It was easy to prove that neither of these wars could ever possibly occur -- until they did.

So the "war is bad for business" argument may challenge the motivation of SOME wars, but it clearly is completely irrelevant for many of the major wars of history.

Crisis wars vs non-crisis wars

I refer to this distinction frequently on this web site, but the current debate over China and Taiwan makes it appropriate to look at it a little differently.

These are two completely different war paradigms, reflecting two completely different ways that wars can begin. Few people grasp this distinction, even though it's crucial to understanding where the world is going today.

We've actually had two recent wars that illustrate this clear distinction:

You have to understand this distinction if you want to understand where the world is going today. People don't think in terms of the "crisis war paradigm," because they've rarely seen anything like it since World War II ended, and when it occurs, it's considered an aberration.

The 1994 Rwanda genocide is an excellent example of a Crisis war, and the international community is still totally baffled as to what happened and why. They have NO IDEA what caused that genocide to occur.

And now we have the Darfur genocide. When it received worldwide attention in 2004, I predicted that the UN would not stop the genocide, because it was a Crisis war, and crisis wars have to run their course. That's exactly what happened, and now, four years later, the Darfur war appears to be no closer to a conclusion than it did in 2004.

That's why I say that politicians, journalists, analysts and historians have no idea about these two different war paradigms, even when they're perfectly obvious. The wars in Rwanda, Darfur, and Lebanon were launched as Crisis wars, and it never occurs to anyone that exactly the same thing could happen with China and Taiwan.

Furthermore, the generational aspect of this is all-important. These Crisis wars can only be launched during generational Crisis eras -- those periods of time beginning 55-60 years after the end of the last Crisis war, when all the survivors are disappearing (retiring or dying), all at once. As long as the survivors of the previous Crisis war are alive and in charge, they make it their life's goal to prevent anything to so horrible from happening again. When the survivors die off, the younger post-war generations have NO IDEA what's coming.

It's worth emphasizing this point more. People who lived during World War II, even as children, saw this kind of irrational, panicky warfare over and over. WW II was not just one war -- it was many wars being fought simultaneously, and each one of these component wars was shocking in its own way. People who lived through that recognize those kinds of panicky emotions, and they spend their lives preventing that kind of war from happening again.

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The survivor generations are so successful in preventing that kind of panicky war that the younger generations are completely unprepared for it. The US has had several non-crisis wars -- the Korean War, the Vietnam War, the 1991 Gulf War -- all fought in the "non-crisis war paradigm." Today's Boomers and Gen-Xers have never experienced anything remotely like a Crisis war.

And when they occur in other nations, they're considered aberrations. According to this reasoning, the Rwanda and Darfur wars are caused by tribal juices, and the Iran/Iraq war are caused by Arab war proclivities. This is nonsense. Crisis wars happen in all nations, though on different timelines.

That's exactly how these crisis wars begin, and how war with China will begin. Perhaps it will begin with an incident in Taiwan. Or perhaps it will begin with an incident with Japan over the Senkaku / Diaoyu Islands. Or, perhaps it will begin within China itself. One web site reader recently wrote to me that it's most likely to begin within central Asia. The scenario can't be predicted, but the final result is certain.

In discussing the Iraq and Lebanon wars above, I glossed over a couple of important points that I'd like to mention now:

In the case of China and the United States today, the "war is bad for business" argument would have applied ten years ago, when there were plenty of survivors around from the two Crisis wars -- World War II for America, and Mao's Communist Revolution for China.

The level of anxiety and paranoia between China and the West is growing daily, as I wrote last week, in conjunction with Tibet and the Olympics torch protests. The West is becoming increasingly suspicious about China, and China is becoming increasingly furious with the West. As I wrote, there's plenty of anti-Chinese bigotry in the West, and the Chinese have good reason to be angry about it, but the problem is that the Chinese are increasingly crossing the line into paranoia, claiming that Western governments and media are purposely campaigning against China. This is exactly the kind of atmosphere that can lead to panic and a military intervention that spirals out of control into a full-fledged Crisis war.

In addition, the 58-year hypothesis fully applies to this situation, since Mao's Communist Revolution ended 59 years ago, in 1949, in the massive bloodbath that led millions of Chinese to flee to the island of Formosa (Taiwan).

Applying the 58 year hypothesis to China today is speculation, and so let's speculate. The Chinese Communist Party (CCP) Central Committee is made up of people in exactly the age group we're talking about -- roughly 63 years old and older, who remember that final bloodbath from their childhood. When these men and women talk to one another, they have a visceral connection with one another, not wanting that bloodbath to be repeated; when they talk to younger people, the younger people can barely figure out what they're talking about. That's the muscle behind the 58-year hypothesis.

In other words, the people in the CCP Central Committee may decide that time is not on their side. They may reach the conclusion that if they don't recover Taiwan quickly, then there'll be a negative outcome. What negative outcome? Here are some possibilities:

Once the Beijing Olympics games end in August, China is going to be a very different place. All the fantasies, hopes and dreams that accompanied the Olympics plans will be over, replaced by a reality that things are worse than ever -- economically and politically. The Central Committee, already in fear of their own people, will become even more paranoid.

It's speculative, but quite possible, that the people within the Central Committee will panic over one, two, three or all four of the above potential outcomes, and decide to launch some kind of overnight assault on Taiwan, "while there's still time." This would lead to threats and counter-threats that would quickly spiral into full scale war.

And as I said, that's only one possible war trigger. A panicky, paranoic CCP may launch military action with Japan, in central Asia, or within China itself.

And with the Shanghai stock market in the midst of a full-scale stock market crash, fury directed at America and the West is going to skyrocket.

And there is nothing, ABSOLUTELY NOTHING, about these scenarios that would make the "war is bad for business" argument relevant.

Political naïveté

As I wrote over a year ago in "Barack Obama to Boomers: Drop dead!" Obama has made his dislike for Boomers very clear. Obama supporters last week were severely criticizing debate journalists for asking Obama embarassing questions, but as a Boomer I'd frankly like to hear his answer to the question of why he hates Boomers so much.

And so some remarks about foreign policy made a few weeks ago struck a chord with me. Here's what he said at a fundraiser in San Francisco on what he's looking for in a running mate:

"I would like somebody who knows about a bunch of stuff that I'm not as expert on. I think a lot of people assume that might be some sort of military thing to make me look more Commander-in-Chief-like. Ironically, this is an area -- foreign policy is the area where I am probably most confident that I know more and understand the world better than Senator Clinton or Senator McCain.

It's ironic because this is supposedly the place where experience is most needed to be Commander-in-Chief. Experience in Washington is not knowledge of the world. This I know. When Senator Clinton brags 'I've met leaders from eighty countries' -- I know what those trips are like! I've been on them. You go from the airport to the embassy. There's a group of children who do native dance. You meet with the CIA station chief and the embassy and they give you a briefing. You go take a tour of a plant that [with] the assistance of USAID has started something. And then--you go."

You do that in eighty countries--you don't know those eighty countries. So when I speak about having lived in Indonesia for four years, having family that is impoverished in small villages in Africa--knowing the leaders is not important--what I know is the people. ...

"I traveled to Pakistan when I was in college--I knew what Sunni and Shia was [sic] before I joined the Senate Foreign Relations Committee. ...

"Nobody is entirely prepared for being Commander-in-Chief. The question is when the 3 AM phone call comes do you have somebody who has the judgment, the temperament to ask the right questions, to weigh the costs and benefits of military action, who insists on good intelligence, who is not going to be swayed by the short-term politics. By most criteria, I've passed those tests and my two opponents have not."

What really bothers me about this is its total rejection of anything that he didn't think of, especially by Boomers. In extreme situations, Generation-Xers adopt a a nihilistic, destructive attitude, with the philosophy of ignoring or destroying everything that came before, in order to rebuild the world from a blank slate. Obama is not at that point, despite his extremely contemptuous remarks about Boomers, but his remarks about foreign policy are similar.

Most young people (and many older people) are attracted to Obama for that very reason -- his semi-nihilistic rejection of everything that came before as representing "change." Youth and inexperience do not guarantee the kind of change that's always welcome. President John Kennedy was the first of his generation, and was recognized as a youthful new leader heralding change. Kennedy's first major foreign policy forays -- the Bay of Pigs disaster and the Cuban Missile Crisis -- might have led to nuclear war with Russia if the 1960s had been a generational Crisis era, which it wasn't. A comparable mistake by a President Obama might well trigger a war, for which the United States might be blamed.

I've reserved these remarks about Obama for this article on the two different war paradigms, and how they apply to China and Taiwan, because this gives me the opportunity to add that none of the three major candidates is really prepared for what's coming.

Humphrey Hawksley's well-articulated article using the "war is bad for business" argument to prove that a war with China over Taiwan is virtually impossible represents a mindset that's held by practically every Boomer and Gen-Xer today, including almost everyone in Washington. Only John McCain might possibly have a better sense, having experienced WW II as a child. But overwhelmingly, Washington and the nation will be totally unprepared for a panicky military action by the Chinese, just as they were similarly unprepared for the Pearl Harbor attack.

A New York Times article about two Democratic supporters claims that the desire for change is so great that the party capturing the White House in 2008 has "a historic opportunity to become the majority party for at least four more decades."

That may or may not be true, but what I found interesting about the article is that the Democrats "have relied heavily in this volume on the work of William Strauss and Neil Howe, who in books like “Generations” (1991) and “Millennials Rising” (2000) have articulated a theory of generational change and who are acknowledged in these pages as key inspirations. Much of the methodology and terminology used here comes directly from the writings of Mr. Strauss and Mr. Howe, as do many of the qualities ascribed to specific generations like the Baby Boomers and the Millennials."

This paragraph is very interesting to me, because Neil Howe and the late William A. Strauss are the founding fathers of generational theory, and it's their theory on which Generational Dynamics was originally based.

And what's MOST interesting about the preceding paragraph is that it mentions two of Strauss and Howe's books, but completely skips over the one that came between them, the 1997 book The Fourth Turning. It's that book, in fact, that forms the heart of their exposition of generational theory, and provides the foundations for the Generational Dynamics forecasting methodology that I developed since 2003. In fact, it was that book that made Strauss and Howe famous, because it predicted that something like the 9/11 attacks would occur around the year 2005.

Well, why did these Democratic strategists mention two of Strauss and Howe's books, the ones that focus on personality characteristics of modern generations, but fail to mention the one that's really of greatest importance to America? My answer is that they prefer to remain oblivious to the Crisis era dangers, just like everyone else in Washington.

While I'm on this subject, it has been occasionally mentioned in the Fourth Turning forum that Newt Gingrich was friends with Strauss and Howe. Gingrich has frequently expressed the public opinion that we're currently in the middle of World War III. Did he form that opinion from the authors' theory as described in The Fourth Turning? Has he seen this web site? Or did he form that opinion in another way?

Perhaps all these mysteries will be resolved one day. Right now, America has no direction, and is hoping for "change." Generational theory tells us that "change" will come, but not from Obama or from any elected president. Change will come with the "regeneracy," a generational theory concept so named because some event -- perhaps a terrorist attack on American soil or perhaps severe military defeat of some kind -- will be so horrible that political bickering will end, and civic unity will be "regenerated" for the first time since the end of World War II.

That event may occur before the election, in which case it will be the dominant issue in the election, or it may come after the election, in which case the new president will have to deal with it.

I'd like to quote one more news story, a "Reporter's Notebook" story by National Public Radio reporter Anthony Kuhn:

"Controversy, Not Crisis, Was Expected in China

NPR.org, April 22, 2008 · We foreign correspondents in China knew this was going to be a historic year, especially with the Olympics. I did not expect the run-up to the games to be free of controversy.

But I did not foresee that the unrest in Tibet and Olympics-related protests would turn into a national crisis of sorts for China. That crisis has now triggered a sharp nationalistic response and made this a defining moment that will affect how young Chinese perceive the West and vice versa.

Rather than an affirming patriotism, this backlash often manifests itself as an intolerant nationalism, as illustrated by two recent news items. In the case of Duke University freshman Grace Wang, pro-China protesters and Internet users labeled her a traitor — and hounded her parents in China into hiding — merely for refusing to stand with them, for communicating with the pro-Tibet students, and urging dialogue between the two camps.

Paralympic fencer Jin Jing [see my article discussing Jin Jing - JX], meanwhile, was hailed a national hero for defending the Olympic flame against protesters in Paris, only to be cursed as a turncoat when she refused to support a boycott of the French retail store Carrefour. Many Chinese have been dismayed by the irrationality of the Carrefour boycott, in light of the fact that it is a Sino-French joint venture which employs mostly Chinese people and sells mostly Chinese products.

It is, however, an easy target. And that can be said of the foreign media as well. Several of my colleagues have had their pictures and contacts posted on the Internet. Many of us have received death threats and hate mail. One or two have fled the country for security reasons. Others are just despondent at being the target of ill will from the population of our host country."

Kuhn is describing his personal shock and surprise at the "backlash" and "intolerant nationalism" that has been engendered in the Chinese by the recent events related to Tibet and the Olympics. Kuhn expects these feelings of "intolerant nationalism" to dissipate once the Olympics games are over, because that's what's happened his entire life. But it's different now, because this is a generational Crisis era, and wasn't before. You can be certain that the "intolerant nationalism" will only continue to increase, until it leads to some panicky violent confrontation, and you can be certain that intolerance towards the Chinese will grow in the West, as well.

That's why it really doesn't matter which of the three -- Obama, Clinton or McCain -- gets elected President. Whoever he or she is, the new President will face the greatest danger in America's history, and will have a unified country behind him to face that danger. At that time, the sweet, wonderful kids in the new "greatest generation" will march off to war when asked, with no complaints and no fear, to save America and the West, as has happened before. (23-Apr-08) Permanent Link
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Investors back in full bubble mode, after concluding that the crisis is over

However, the fundamentals haven't changed.

There's a great deal that's bizarre in today's global financial system, but it's hard to beat what happened on Friday.

Early in the morning the "Dow futures" were flat, indicating that the stock market would probably be flat when it opened at 9:30 am.

But at 6:30 am Citigroup announced really terrible earnings and additional writedowns of assets. The news was awful. So what happened? The Dow futures rose by 200 points, and the day with the market up almost 2%. It was truly astonishing.

One financial pundit after another said the same thing: The 'credit crunch' is over. The credit crisis is over. The assets writedowns are almost over.

The sudden and dramatic change that I wrote about last week is continuing.

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 April 18 version of the chart:


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

As of last week, the p/e ratio index had suddenly spiked up to its highest value since 2005. That trend has continued for another week, as you can see from the region circled in red. The p/e ratio has spiked up further, to the highest value since 2004.

This is an absolutely incredible new trend. I'd say that it's "unbelievable," but so many "unbelievable" things have happened in the last two years, especially in the last six months, that "unbelievable" is the new norm.

Furthermore, this should really be big news. You'd think a sudden spike in p/e ratios to the highest value in four years would be worth a headline or two, but I've heard not a peep.

Each week I think that the craziness can't get any worse, but somehow it always does.

Betting the bank

I've written several times about Ben Bernanke and his Great Historic Experiment, and his belief that the 1930s Great Depression could have been avoided if the Fed had simply lowered interest rates sooner. I've written many times that this view doesn't make sense, but I won't go into that again here.

What has surprised me these last six months, since the credit crunch began in August, was how far the Fed was willing to go. The Fed seems to be willing to "bet the bank" that it can prevent a systemic financial crisis (what I would call a generational panic and crash).

On Monday, the Bank of England joined the club by announcing its own plan, similar to the Fed's.

There are now so many of these plans, offered by the Fed, the Bank of England and the European Central Bank (ECB), that it's almost impossible to keep all the details straight. But there's no need to understand the details because they all have the same major purpose: Allow financial institutions to continue to lie about the values of their assets.

What the credit bubble did is that it created tens of trillions of dollars of securities (CDOs or collateralized debt obligations), backed by mortgage-based securities, on the assumption that the housing bubble would continue forever. The math behind these CDOs was based on numerous false assumptions, as I explained in "A primer on financial engineering and structured finance." In addition, the same mindset that created the fraudulent CDOs also invented the hare-brained auction rate securities scheme, which has created in more trillions of dollars in worthless securities.

Financial institutions around the world have the worthless assets on their books, and various accounting rules have been forcing them them "write down" their values from their inflated nominal values to more realistic market values. This is a problem since many of them are worthless.

So, the banks, various agencies, and the government have been coming up with one scheme after another to allow banks to keep the phony inflated nominal values on their books. The first really major example was the Master-Liquidity Enhancement Conduit, or M-LEC, dreamed up last October. It was essentially a way for banks to commit fraud, sanctioned by the government.

These and other schemes have not prevented the forced writedown of many bank assets, now totalling something in the neighborhood of $500 billion.

Now, keeping in mind that some tens or hundreds of TRILLIONS of dollars of these phony securities were created in the credit bubble, it's pretty clear that the writedowns have a long way to go.

Even worse, there's a domino effect. When one institution is forced to write down its worthless assets, it has to sell off some of its "good" assets to meet reserve requirements, and that pushes down the the prices for the "good" assets, which can force another institution into panic selling.

This was the issue six weeks ago when Bear Stearns was on the verge of bankruptcy. The Fed arranged to save the company because it might have caused exactly this kind of chain reaction.

Since then the Fed and other central banks have decided to "bet the banks" that they can stop this chain reaction. They've set up programs whereby commercial banks, and now even investment banks, can trade in their "bad" assets for "good" assets from the Fed. They can turn in their CDOs, and get Treasury bills in return.

The "good news" is that the assets don't have to be written down any more, since they're on the Fed's balance sheet, rather than the bank's balance sheet. The bad news is that the Fed's balance sheet is being loaded up with worthless assets.

And now, thanks to Monday's announcement, the same thing will be happening with the Bank of England.

This cannot possibly work for long, as you can see just from the numbers. The Fed has about $1 trillion on its balance sheet, and the Bank of England has about $100 billion. That's a drop in the bucket compared to the hundreds of trillions of dollars in vulnerable credit derivatives that were created during the credit bubble. So all these actions can do is postpone the inevitable.

Negative Fed funds rate

I've had questions from readers and seen discussions about the fact that the Fed funds rate is now effectively negative.

That is, the Fed funds rate is supposed to be at 2.25%, but the Fed is unable to maintain that interest rate, and in fact this interest rate is now effectively negative.

A lot of people believe that negative interest rates are impossible. Actually, that's simply not true. There is no such restriction.

In this case, I don't know the details of what's going on, but I can provide a conceptual explanation. Treasury bills are issued by the Treasury Dept. to financial institutions. The Fed can purchase these Treasury bills from these financial institutions.

In "normal" times, the Fed can control interbank interest rates -- the amount of interest that one bank charges to lend money to another bank -- through the use of "open market operations," as I explained in my August article, "Bernanke's historic experiment takes center stage."

In essence, a bank can lend money to the Fed by purchasing a Treasury bill from the Fed. When the T-bill expires, the Fed has to buy it back, with interest. That's in "normal" times, when the Fed funds rate is positive.

But these days, the credit crunch is keeping banks from wanting to lend money to banks at all, or at anything but the very highest interest rates. And so the normal "open market operations" are not working at all. In fact, T-bills are becoming as scarce as hen's teeth, as financial institutions are forced to provide these instruments to fulfill some contract.

Now, if T-bills are scarce, then the price goes up, and if the price goes up high enough, then interest rates are effectively negative.

There are many parties involved in the buying and selling of T-bills, and I don't have a clear idea of how these various sales are carried out, and so the above is just a conceptual explanation. What all this shows is that the Fed's monetary policy doesn't have much effect these days, as it does in "normal" times.

The LIBOR controversy

Libor -- the London Interbank Offering Rate -- is an international bank to bank lending interest rates. Libor is determined each day by the British Bankers Association (BBA) by doing a daily survey of banks, asking them what interest rates they're charging each other.

A scandal broke out last week, when it was thought that banks were lying to the BBA about what interest rates they were paying. They were apparently understating the interest rates, in order to avoid embarrasment. If this was true, it would mean that the Libor rate was no longer credible.

On Wednesday of last week, the BBA announced that it would investigate whether banks were distorting the Libor rate, and would punish any offenders. As soon as that announcement was made, the Libor rate spiked up to new highs.

The Libor rate is used by many financial institutions to set other prices, including the interest rate for home mortgages. So an increase in the Libor rate is expected to have wide fallout.

Shanghai


Shanghai stock market index, for five years ending April 21, 2008 <font size=-2>(Source: MarketWatch)</font>
Shanghai stock market index, for five years ending April 21, 2008 (Source: MarketWatch)

I have to mention the continuing crash of the Shanghai stock market, as can be seen from this graph.

The Shanghai stock market has fallen 50% from its October high.

This is turning into a full-scale stock market crash, with devastating consequences for the Chinese economy. At the very least, it raises many concerns about what's going to happen to China once the Olympics games end in August. What I don't understand is why this stock market crash isn't a major international news story.

Another thing that's affecting China and other countries around the world is the never-ending surge in food prices. There are more and more food riots occurring around the world, as you can see for yourself by typing "food riots" into Google news. It's been obvious for years that food prices have been surging, and I've been writing about it since 2004. It's only in the last week or two that I've begun to see news coverage about the food price problem, but the world is still mostly oblivious to it, and its enormous dangers.

For investors, there's nothing to worry about. The credit crisis is over, asset writedowns are over, the stock market will start rising again without limit, and the world is a wonderful place.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (22-Apr-08) Permanent Link
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Generational Dynamics Country Studies -- "beta" version is now online

Useful information for 267 different countries is now available.

Click here for Index to Generational Dynamics Country Studies

This is something I've been wanting to do for a long time. When it's finished, it will contain generational information for all countries, including crisis wars, generational timelines, and generational histories, as well as a cross-reference to related articles on this web site.

Actually, it's already the best "first stop" if you want to research a particular country, because there are already links to many other resources for each country. You can go to the country page, and quickly click on 5 or 6 other resources, bringing them up in different tabs of your browser.

Here's what's currently available for each country:

Additional links will be added, and more generational information will be provided, as time permits.

As usual, suggestions from web site readers are welcome. I'd particularly like to hear about other country resources that can be linked to.

Click here for Index to Generational Dynamics Country Studies (20-Apr-08) Permanent Link
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Vladimir Putin finds a way to retain power in Russia.

In a major power shift within the Russian government, Russian president Vladimir Putin will assume TWO powerful roles when he steps down as President on May 7: He'll become both Prime Minister and head of the United Russia party.

On Tuesday, in a surprise to westerners, Putin accepted the invitation to head the United Russia party, even though he isn't even a member of the party.


Vladimir Putin accepts United Russia leadership role.  The sign reads, "We will win together!" <font face=Arial size=-2>(Source: kommersant.com)</font>
Vladimir Putin accepts United Russia leadership role. The sign reads, "We will win together!" (Source: kommersant.com)

There's an enormous of game-playing going on here. Putin was elected President twice and could not run for a third term, according to the Russian constitution. He arranged a deal so that his ally Dmitry Medvedev. Medvedev would win the March 2 elections and become President, and then Medvedev would appoint Putin as Prime Minister. That change is scheduled for May 7, when Medvedev will take over the President's office in the Kremlin, and Putin will move down the street to the Russian White House to take the Prime Minister's office.

Putin does not belong to any political party, since it's considered poor practice for elected officials to belong to political parties. However, the United Russia party was formed to support Putin, and on December 2, United Russia won won the Russian Parliamentary election by a landslide.

So Putin is going to head the United Russia party, even though he's not a party member. And since the United Russia party controls more than two-thirds of the Russia Duma, Putin has the votes to change the constitution. In many ways, Putin will have more power than the newly elected President Medvedev.

Putin has rock-star status in Russia. Did Putin arrange to have Alexander Litvinenko poisoned with polonium? That's fine with the Russians. Did Putin arrange to nationalize Yukos and other Russian companies by the vilest means possible? The Russians love it. Did Putin have journalists killed? Did Putin arrange for a cyber attack on Estonia? That's great, according to the Russians. Putin helped Russia recover from 1998 financial collapse, and Russians want him to continue his policies.

So it's not surprising that the Russians will tolerate any method that Putin chooses to use to keep himself in power.

But what about Dmitry Medvedev? Is he just a pawn, theoretically the head of government, but ready to do anything Putin wishes? He says that he isn't.

Russian analysts think that this is GREAT. (Remember that journalists who disagree with Putin occasionally are found full of bullet holes.) According to an analysis by a Russian TV anchor, "For the first time ever we will have a prime minister who will be the head of a party. The mechanism of political power is becoming something new. As president Putin said this will allow better co-operation between the executive and legislative powers."

Western analysts aren't so sure. So far, Medvedev is not saying anything that disagrees with Putin's policies. But what happens when the two men disagree? Will President Medvedev get his way, as Putin used to do when Putin was President? Or will Putin smash him down. My bet's on the latter.

Western analysts point out that Russia is not the kind of country where the leaders compromise with one another. Russia has a long tradition of having one leader -- a Tsar, a dictator, or Putin. There is no national culture in support of a two-leader government.

In the weeks and months to come, we may see a major constitutional crisis in Russia, as the two leaders clash. But barring some threat to his physical survival, it's pretty clear that Putin will the the one to lead Russia into the Clash of Civilizations world war.

But enough about politics. It's time for the evening's entertainment.

You may recall that last month when I wrote about French President Nicolas Sarkozy's political situation, I concluded with a little something about his whirlwind romance and sudden marriage to singer and supermodel Carla Bruni.


Alina Kabaeva relaxes after a tough day at rhythmical gymnastics <font face=Arial size=-2>(Source: pravda.ru)</font>
Alina Kabaeva relaxes after a tough day at rhythmical gymnastics (Source: pravda.ru)

Well, no self-respecting Russian leader is going to allow himself to be outdone by a mere French leader.

Pravda is reporting rumors that Putin has divorced his wife and will marry rhythmical gymnast Alina Kabaeva, a superstar and gold medal winner at the 2004 Olympics in Athens. According to the rumors, Putin divorced his wife in February, and will marry Alina on June 15.

Pravda is also providing a Photo gallery: Alina Kabaeva, the most flexible body of Russia.

And so, who won - Sarkozy or Putin? Who's sexier -- Carla Bruni or Alina Kabaeva?

We'll let you decide. To help you, here's a video of Alina's 2004 award-winning performance. This video is absolutely breathtaking.

(18-Apr-08) Permanent Link
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Chinese call for a "people's army" to protect Olympics torch in Australia

Call is to protect torch from "splittists", "scum" and "running dogs"

Xenophobic and angry rhetoric between China and the West continued to increase this week, as security plans took shape for the Asian leg of the Olympics torch relay.

Thousands of "patriotic Chinese" are expected to rally in Canberra on April 24 when the Olympic torch arrives. The mass campaign is being organized by student leaders in Sydney, Melbourne and Canberra, with the cooperation of the Chinese embassy. The organizers promise peaceful, non-violent actions.

On its face, there's nothing particularly alarming about this situation.

The problem is that a pattern of overreaction is developing on both sides, especially the Chinese side, and this leads to concerns the rally will turn violent.

As I wrote several days ago in "Chinese embarrassment and anger grows over Tibet and Olympics," the Chinese have plenty of reason to be angry. When the torch was in London and Paris, Chinese security guards were called "horrible Chinese thugs" by London's Daily Mail, and China's beloved fencing star, Jin Jing, was approached and threatened by a Tibetan separatist. There's an enormous amount of anti-Chinese bigotry in the West.

However, the problem is that the attitudes of many Chinese have exceeded mere anger, and are crossing the line into paranoia, blaming the Western media and Western governments for PURPOSELY attacking China, just at a time that should be their greatest triumph, the summer Olympics. Thus, the planned rally could indeed break out into violence.

The feelings of xenophobia and paranoia are not all one-sided. A new Harris poll has found that Europeans increasingly see China as the greatest threat to world stability and security. Those crazy Europeans used to say that the United States was the greatest threat, but that's changed now. The number of respondents saying that China was the biggest threat has been increasing; it's at 35% now, it was 19% in 2007, and only 12% in 2006.

Actually this poll is very interesting for another reason. Naming the US as the world's greatest threat was never anything more than fatuous political nonsense, but the selection of China represents real anxieties and fears, and indicates a substantial change in behaviors and attitudes by the Europeans.

So what we see growing quickly is increased paranoia and nationalism on all sides -- exactly the emotions likely to lead to miscalculation and a surprise confrontation that escalates quickly into full-scale war.

Here's the schedule of the torch relays in Asia:

    April 16 - Islamabad, Pakistan
    April 17 - New Delhi, India
    April 19 - Bangkok, Thailand
    April 21 - Kuala Lumpur, Malaysia
    April 22 - Jakarta, Indonesia
    April 24 - Canberra, Australia
    April 26 - Nagano, Japan
    April 27 - Seoul, South Korea
    April 28 - Pyongyang, North Korea
    April 29 - Ho Chi Minh City (Saigon), Vietnam
    May 2 : May 8 - China
    May 8 - Beijing Olympics opening ceremony

Already, Pakistan and India have announced altered routes for their legs of the relay, in order to keep demonstrators at bay, and Japan has canceled a big torch-related event. Such things infuriate the Chinese, because they see it as intentional efforts by the Western press and Western governments to humiliate the Chinese.

The situation is this: Tibetan separatists are trying to provoke a confrontation. Paranoic, nationalistic Chinese officials are inclined to overreact. Anger and nationalism are increasing on all sides. The situation is ripe for a major international incident. How major will depend on how much the Chinese overreact to the Tibetan separatists and other human rights accusers.

The most critical time, in my opinion, will be the weeks and months following the end of the Olympics. It seems quite likely that (a) some incident will occur that raises Chinese nationalist feelings; (b) the Chinese will overreact, creating an even larger incident, provoking nationalistic feelings in the West; and (c) the Chinese will view the whole thing as an intentional act by the West for ruining the Olympics for China.

Thus, it's possible that the Olympics will end with the furiously angry Chinese blaming the West for some perceived intentional wrong.

If this were a generational Awakening or Unraveling era, then those feelings of anger, paranoia and nationalism would die down and fizzle out. But in fact we're in a generational Crisis era, 63 years after the end of WW II, and that makes all the difference.

The feelings of anger, paranoia and nationalism will not die down. They will continue to increase. Whether those feelings lead to violent confrontation right away, or whether they have to build for a while first, there is no doubt that China and the West are headed for a major crisis war. The exact timing cannot be predicted, but from the point of view of Generational Dynamics, the end result is 100% certain. (16-Apr-08) Permanent Link
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Price/earnings ratios spike upward dramatically, portending stock market correction

First quarter corporate earnings estimates fell again, driving up P/E ratios.

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 April 11 version of the chart:


S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 11-Apr-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 11-Apr-2008. (Source: MarketGauge ® by DataView, LLC)

As you can see from the region circled in red, the p/e ratio has spiked upward to its highest value since 2005. This is a sudden and unexpected change.

For the past couple of years, p/e ratios (also called "valuations") have remained close to 18. This indicates that investors have all been following the same formulas in deciding whether to buy or sell stocks, and that stock prices have gone up or down as corporate earnings estimates have gone up or down.

That link was suddenly broken in the last couple of weeks. Corporate earnings estimates have fallen dramatically recently (see below), but investors have been keeping stock prices fairly steady.

Why aren't investors selling off? The answer appears to be that investors have concluded that the "credit crunch" and "asset writedowns" are pretty much over.


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

One of the most gushing spokemen for this point of view is CNBC contributor Jack Bouroudijian, appearing on Monday morning, when he said the following:

"You know, it's all behind us, guys. We are in the 9th inning of this game. The credit story is now a thing of the past, in my mind. ...

I talk to portfolio managers that have been sitting on hordes of cash. We're talking about piles of cash, whether it be in London, whether it be in Singapore. They're waiting for the right moment for that money to get invested in this country, in our markets. And remember, our markets are more than just US equities. These are global corporations, headquartered in the US. They're waiting for the right moment, they're starting to trickle in. ...

The economic seizure that we just went through ... over the last six months -- that is what I'm talking about. It took a few months to work through the SEIZE in the market.

What we're looking at now is the situation where the economy is working its way through all of that, and now it's a question right now of whether you have the GUTS to be buying this market right now, instead of selling.

The credit crunch was nothing more than a seizure of the entire credit markets. That had to be worked out."

It's hard to see why any part of this is anything but wishful thinking on Bouroudijian's part. In fact, Bouroudijian was saying all this on Monday morning just at the time that Wachovia was announcing a large new asset writedown, and much lower than expected first quarter earnings.

Still, Bouroudijian's outlandish statements appear to be widely held among investors, and many of them are expecting stock market bubble to start growing again.

In fact, the upward spike in price/earnings ratios really portends a further plummeting of the stock market, if we believe the trends of the last 2-3 years. Once investors realize that the lower earnings are for real, they'll presumably all go back to following the same formula as ever, and drive stock prices down again.

Finally, let's update our table of corporate earnings estimates. Each week, we add a line to the table indicating the estimates of first quarter corporate earnings as of that week.

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

"Earnings Central Stats As of Friday, April 11th:

32 companies in the S&P 500 have reported earnings for Q1, 71.88% have beaten estimates, 9.38% were in-line, and 18.75% have missed. (Data provided by Reuters Estimates)

The blended earnings growth rate for the S&P 500 in first-quarter 2008, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -14.1% from -12.2% due in part to lower earnings from General Electric and downward revisions to the Financials.

On January 1st, the estimated growth rate for Q1 was 5.7%. (Data provided by Thomson Financial)"

This allows us to add one more line to our table, as follows:

  Date    1Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct 23:             +10.0%
  Jan  1:              +5.7%
  Feb  6:              +2.6%
  Feb 29:              -1.1%
  Mar  7:              -4.3%
  Mar 14:              -7.8%
  Mar 21:              -7.9%
  Mar 28:              -9.3%
  Apr  4:             -12.2%
  Apr 11:             -14.1%

We're in the familiar pattern of continually falling earnings estimates. The only thing that hasn't happened is that investors haven't pushed stock prices down to follow the earnings down. That will presumably happen soon.

From the point of view of Generational Dynamics, what we're expecting is a generational panic and stock market crash, the first since 1929. This is indicated by the following historical p/e ratio chart:


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

P/E ratios have been historically above average since 1995, and by the Principle of Mean Reversion, will have to fall to historically below average values for a roughly equal amount of time. Several times in the last century, and as recently as 1982, P/E ratios have fallen to the 5-6 level, and that kind of fall seems to be imminent again.

A generational panic and crash is an event that will make history. It's impossible to predict exactly when it will happen, and it's folly to even guess, but that doesn't seem to prevent me from wanting to try to guess anyway. Actually, all I want to do is make one observation: That the the 1929 crash occurred on October 24, in the third week of the quarter. Nobody has convincingly identified any event that triggered the 1929 crash, but one possibility that's occurred to me is that the announcement of lower corporate earnings for the third quarter of 1929 was the trigger. I haven't checked this out, and I don't even know where I'd find those earnings figures, but if earnings announcements were lower than expected, it would make sense that the panic was triggered by that.

That's just a guess, however. Beyond that, I just use a kind of "safe harbor" statement by saying that I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate.

Investors appear to be anything but panicked right now, especially in view of the sudden and unexpected upward spike in price/earnings ratios. It's almost as if investors are holding their collective breaths, waiting to see what will happen next, hoping the next couple of weeks will bring higher than expected first quarter earnings reports. Unless earnings reports are unexpectedly high, the continuing fall in earnings estimates portends a fall in the stock market indexes, irrespective of when a panic occurs. (15-Apr-08) Permanent Link
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Blogger watch: Hellasious at SuddenDebt gets it right

Roubini and the others just play around with alphabet soup.

Over the last couple of years, I've been very critical of the economic bloggers for refusing to face up to the consequences of their own analyses. They would post blog entries telling of disastrous economic data, and then conclude with something like "This might lead us to a recession if we're not super-extra careful." Any comparison to the 1929 crash and the 1930s Great Depression is verboten.

The best and most sophisticated of the economic bloggers, in my opinion, is the Sudden Debt blog, hosted by "Hellasious." Whereas the other economic bloggers are like weather forecasters who look out the window and predict whether or not it's raining, Hellasious has posted very sophisticated analyses of the macroeconomics of the credit bubble and the derivatives market that really make clear how a major worldwide financial crisis cannot be avoided.

So, a year ago I posted a question to him, asking him what he believed the outcome would be, and whether he foresaw a crash, as in 1929. He responded by predicting something similar to the Panic of 1893. This was a very odd response, and it may well have been a joke.

At any rate, last month Hellasious changed his position. In a March 12 posting called "History Rhymes in Slow Motion," he predicted that the current outcome "won't likely be any different" from the crash of 1929. Here's what he wrote:

"The repeated attempts by the Fed to arrest the credit contraction and prevent equity markets from going into a tailspin look to me like a repeat of what happened in October 1929, albeit in extra-slow motion. As an avid student of market history (... "it rhymes"), I highly recommend the careful reading of Galbraith's The Great Crash of 1929.

Within it are described concerted attempts to forestall the inevitable. As the market swooned in late September and early October 1929, "great men" from Morgan and National City Bank were sent to walk the floor of the New York Stock Exchange. They made a grand show of providing money at the broker call-loan post (margin funds) and supporting a variety of blue chips like Steel and Radio with repeated buy orders.

Their actions cheered speculators, who ramped up prices sharply for a few days. But when conditions worsened once again, the "great men" had to give up in order to protect their own institutions.

This time the "action" is taking weeks rather than days to play out, because:

* The "great men" have been replaced by the Fed, which has more resources at its disposal and less inhibitions to using them. It has no shareholders or depositors to protect (except for millions of taxpayers, but that's too amorphous a group) and the man at the helm is stubbornly certain he is following the right course.

* Markets are far more diverse and complex today than the simple stocks, bonds and trusts of 1929. While the overall leverage may in fact be far greater today, there are also more dominoes at play, i.e. more products (e.g. derivatives) and more players (e.g. all sorts of funds). Starting as always with the "bad debt" domino, it takes more time now for the whole series of them to drop before the final "equity" domino is hit a decisive blow.

* After 25 years of successful Fed action that averted or contained financial crises, its abilities have become an article of faith with most speculators, investors and - most unfortunately - politicians. This past performance has created widespread complacency; time and again I hear the same adage from "sophisticated" market participants: "They won't let it get out of hand". The Greenspan put has morphed into the Bernanke put, even though conditions are far more dangerous now.

To summarize, events are proceeding more or less along the same path as 1929 but with more fits and starts. The experience is akin to watching a football game entirely in slow motion - it may take a while to get to the end, but the outcome won't likely be any different."

I jokingly posted a response saying, "Congratulations and welcome to the 'dark side' of the street. I used to be alone over here, but these days I think you'll find that you're in the company of quite a few old friends."

Roubini's 12 steps to financial disaster

Unfortunately, the other economic bloggers are simply stonewalling on the consequences of their own analyses.

The master at this stonewalling is Nouriel Roubini at his RGE Monitor blog. Roubini is a professor of economics and international business at the Stern School of Business, New York University. He's world-renowned, not only because he's a professor, but also because he's been economics adviser to Presidents and other government officials.

Last July I was joking about his bragging that he had predicted a housing recession a year earlier, when this was obvious much earlier.

As early as 2004, I had written that "Real estate is in an overpriced bubble all over the world," and in August, 2005, I quoted Alan Greenspan as saying:

"To some extent, those higher [stock and housing] values may be reflecting the increased flexibility and resilience of our economy. But what [investors] perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

There's a lot of finger pointing at Alan Greenspan going on these days, but in fact he called these dangers long before any of these economic bloggers did (though not before I did). So it's silly for any of these economic bloggers to brag about making early calls on these problems, when the problems were already evident years before.

However, Roubini did post a brilliant column on February 5 of this year, called "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster." His column laid out 12 different dimensions of the global economy that were seriously failing, potentially resulting in a "systemic financial meltdown." In brief, the 12 steps are as follows:

  1. The "worst housing recessing in US history" shows no sign of bottoming out.
  2. Losses from the financial system "from the subprime disaster," especially writedowns of mortgage-backed assets are continuing.
  3. Other forms of unsecured consumer debt, including credit cards, auto loans, student loans, are also increasing.
  4. The "monoline" bond insurers, such as MBIA Inc and Ambac Financial Group are collapsing.
  5. There's an impending meltdown in commercial real estate loans, similar to the meltdown of residential loans that we've been seeing.
  6. There's an expected collapse of "some large regional or even national bank that is very exposed to mortgages, residential and commercial."
  7. The collapse of the leveraged loan market, while good in that it ends financing of "very risky and reckless" leverage buyouts (LBOs), has left these very high risk loans on bank balance sheets.
  8. "Once a severe recession is underway a massive wave of corporate defaults will take place."
  9. The "shadow banking system," composed of SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions, will get into serious trouble. (Since writing this column, Bear Stearns has collapsed.)
  10. US and foreign stock markets "will start pricing a severe US recession," leading to "a cascading fall in equity markets."
  11. A "worsening credit crunch" will lead to a much worse "dry-up of liquidity in a variety of financial markets."
  12. A "vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction." He adds, "A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt."

Wow! This is REALLY grim stuff. So what does Roubini think will be the outcome? "A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress."

You've GOT to be kidding! As I explained in "System Dynamics and the Failure of Macroeconomics Theory" and in "How to compute the 'real value' of the stock market," the "false panic of 1987" was fairly brief because the stock market was already underpriced, while the stock market today is overpriced by a factor of almost 250%, same as in 1929.

Alphabet Soup

Last week, on April 7, Professor Roubini wrote a new column, "The US Recession: V or U or W or L-Shaped?" where he introduced what might be called the "alphabet soup recession analysis."

He begins by saying, "Now that there is no doubt that the US is experiencing a recession, the debate is moving towards the length, size and depth of such a recession. Will it be a short and shallow recession or a longer and deeper one?"

This is totally bizarre. In his "12 steps" posting, he talked about "panic, fire sales, cascading fall in asset prices" and "real economic distress as a number of large and systemically important financial institutions go bankrupt." How can he even debate whether this will be a "short and shallow" recession?

He described four different scenarios for the coming US recession, based on four letters of the alphabet:

Roubini rejects the L-shaped recession, because "both monetary and fiscal stimulus have started in earnest early on," while they were delayed in Japan. He rejects the W-shaped recession because he doesn't believe that the tax rebate will be sufficiently effective.

He settles on the U-shaped recession, 12-18 months long, based on the following incredible reasoning: "The last two recessions – in 1990-91 and 2001 – lasted 8 months each and today the macro and financial conditions are worse – relative to those two previous recessions."

This reasoning is so bizarre I can barely even address it. How does he arrive at 12-18 months? By comparing it to two previous recessions that had ALMOST NOTHING in common with what's happening today. This is an economics professor who (like Ben Bernanke) has absolutely no grasp of the macroeconomics of a credit bubble, and what the bursting of the credit bubble means.

The other economic bloggers picked up on this "alphabet soup" discussion.

I can only shake my head in bewilderment at all these analyses which are, to repeat, the same as a weather forecaster looking out the window and "predicting" whether or not it's raining. There's no recognition of trends, there's no understanding of the global financial system as an integrated system, and there's no attempt to grasp what the bursting of the credit bubble means. It's all just guesswork.

The only one of the major economics bloggers who's getting it right was Hellasious at the Sudden Debt blog.

In an April 9 article, entitled "a + b = \", he writes:

"As even optimistic analysts now believe that a recession is upon us, the debate has shifted to its "lettering": will it be a quickie in-and-out (V), a more prolonged (U), a double-dip (W), or a Japanese version (L) ? My opinion is somewhat different and is not described by a letter, but the - aptly named - slash (\). To wit, I believe we are in for many years of painfully slow contraction, akin to a maddening Chinese drip-drip-drip torture.

The reasons for this view are:

(a) The elements dragging down the economy are deeply-rooted and fundamental. Huge debt, low earned income, zero saving rate, resource depletion and climate change cannot be reversed by a "mild purgative" recession. If left completely unattended, the economy would go into a tailspin (|).

But, at the same time:

(b) Monetary, fiscal and political authorities, steeped as they are in decades of Keynesian and central banking traditions, will be confident of their abilities to cure the economic cycle's weakness. They will keep applying their customary medicines to stop the decline, with some temporary success. If that was all, the economy would go into a flat-line ( _ ) or a slight uptrend (/).

But because of (a), this slowdown virus will prove far too resilient against the usual treatments designed to combat the common economic flu, and the decline will resume until a completely different set of doctors take over and prescribe the necessary radical treatment.

Symbolically, then: a + b = \"

Unlike the other bloggers' analyses, this one actually makes sense from the point of view of generational theory. He says that the problems are "deeply rooted and fundamental," and talks about officials "steeped ... in decades of Keynesian and central banking traditions," and "confident of their abilities" to fix any problem. Those are the people in the Boomer generation, born after WW II, who have no idea what they're doing.

He says that the decline will continue "until a completely different set of doctors take over and prescribe the necessary radical treatment." Those doctors will be like Congress in the 1930s, trying to figure out what happened, and passing new laws to keep it from happening again. By then, it will be too late for a lot of people.

The economics journalists

I'll just briefly mention the economics journalists. They stay out of these debates, except sometimes to say something like, "Über-bear Nouriel Roubini is worried about a recession."

There are two categories of economics journalists:

A lot of this stuff is really funny, and I frequently make fun of it on this web site. My favorite is still the day in January when two investment counselors came on CNBC. They said investors are panicking and selling their stocks, and added that people with brain disorders make better investors, because they don't get so emotional. People like these are just good, clean fun.

But something happened this week that really infuriated me.

On April 10, in an event carried by CNBC, Fed chairman Ben Bernanke was answering audience questions on the economy. Then somebody asked a question about whether today's financial conditions are similar to those in 1929, leading to the Great Depression.

The question was, "In the press there have been a number of reports that this has been the most severe economic dislocation since the Depression. As a scholar of the Depression, could you comment on some of the significant similarities and differences ...." At that point, the plug was pulled, and CNBC immediately cut to a commercial break.

Now, one could argue that they were planning to go to a break at that time anyway, but what I believe is that the CNBC producers heard the word "Depression" and freaked out.

CNBC's Pollyanna policies have been richly amusing in the past, but when they actually allow those policies to affect a live news event, they're crossing a line. This behavior is absolutely outrageous.

Here's a link to the video of the 7:25 minute segment. The offending question occurred at the 7:00 point. Judge it for yourself. (13-Apr-08) Permanent Link
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Food panics and riots spread around the world

The unending sharp price wheat, corn and rice prices are destabilizing nations.

Food panic is spreading around the world, especially in the developing world, thanks to unending increasing in grain prices.

Related Articles

Food Prices
Food rationing comes to the United States: After years of price rises, mainstream media is finally recognizing there's a problem.... (24-Apr-08)
Food panics and riots spread around the world: The unending sharp price wheat, corn and rice prices are destabilizing nations.... (9-Apr-08)
UN World Food Program to institute food rationing: Surging food prices are causing food riots around the world.... (26-Feb-08)
Wheat price rises blocked by commodities market price increase limits: American wheat stockpiles are lowest since just after World War II.... (9-Feb-08)
Wheat prices surge above $10 per bushel, sparking little concern: World food stocks dwindling rapidly, according to the UN.... (23-Dec-07)
UN expert calls biofuels a "crime against humanity": Separately, Oxfam says that biofuels won't work, and they "trample" poor people.... (7-Nov-07)
United Nations warns of social unrest as food prices continue meteoric climb: With world wheat prices now up 60% since January, countries are panicking... (08-Sep-07)
World wheat prices up 30% since May on panic buying: Wheat prices hit an all-time record high, as stocks are low, and poor weather... (25-Aug-07)
The global warming fad is becoming the enemy of food production.: Food prices are continuing to increase sharply around the world.... (16-Jul-07)
Price of food is skyrocketing in India and China: In fact, crop prices are increasing around the world,... (11-Apr-07)
In Mexico, violent crime from drug cartels increases with tortilla prices: After Acapulco incident, Canada may advise citizens not to travel to Mexico.... (8-Feb-07)
UN World Food Program will cut Darfur humanitarian rations in half: This continuing genocide is a very sad situation, but it can't be stopped.... (29-Apr-06)
In a new bizarre move, North Korea demands an end to U.N. food aid: The famine-stricken country officially told the UN World Food Program... (26-Sep-05)
Food prices continue to increase dramatically around the world: Hunger, poverty and starvation are spreading to increasing masses of people around the world,... (10-Aug-05)
China appears to be approaching a major civil war : Unrest is spreading, and economic disparities make China a textbook case for a massive civil war in the making (16-Jan-2005)
Green Revolution vs Malthus Effect: Despite the "Green Revolution," world population continues to grow faster than food production. This is one of the fundamental reasons why wars occur. (28-Jun-2004)

If you want to see a lot more examples, just type "food prices" or "food riots" into Google news.

I first started writing about rising food prices in 2004, with "Food: Green revolution v Malthus effect." In 2005, I wrote an article that showed that food prices had been falling for decades, but had started to rise much faster than inflation in the year 2000.

What has happened since then has been nothing short of amazing. Food prices really started shooting up fast in 2005, even faster in 2006, faster in 2007, and now in 2008 they're going off the charts.

I November, I wrote that we must be close to a 'tipping point,' because food prices seemed to be accelerating. Now, we appear to be right at that tipping point.

Economies throughout Asia are being hard-hit by the price rises. Worldwide wheat prices have almost doubled in the last year. Rice prices have increased 20% just this year alone.

What is most amazing to me about all this is how oblivious almost everyone is to this problem. The Haiti food riots got a little coverage on the BBC, and a recent speech by World Bank president Robert B. Zoellick got a little coverage, but basically this problem is being ignored (except, of course, by the people who are actually starving).

Food prices began rising in 2000, and have been accelerating since 2004 and 2005. I've written about the reasons many times, and here's a summary of the reasons:

Many people pooh-pooh the famous Essay on Population written by Thomas Roberts Malthus in 1798. This essay made the point that population grows faster than food production. People claim that Malthus has been proven wrong because there have never been the massive famines and deaths from starvation that Malthus predicted.

Malthus' error was in predicting that food scarcity would produce famines. That's wrong. Intelligent human beings don't simply lie down and die quietly when they can't feed their families. That's not what they do.

When intelligent human beings can't feed their families, they go to war. That is what I've called the "Malthus effect."

The rhetoric is familiar -- "those greedy black/white people," "those greedy tall/short people," "those greedy speculators," "those greedy Muslims/Christians/Jews," "those greedy capitalists," "those greedy Communists," "those greedy immoral idolaters," etc., etc. Whatever the reason is, it amounts to one group identifying another group from whom food will be demanded, on pain of war.

Dear Reader, the rise in food prices which has been going on for eight years now is truly historic, and will have historic consequences.

As more and more people in the world are forced into poverty and starvation because of the Malthus Effect, the political state of the world is becoming increasingly unstable. Generational Dynamics predicts that we're headed for a new "clash of civilizations" world war, and it will happen sooner rather than later. (9-Apr-08) Permanent Link
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Investors have gone beyond "Bad news is good news."

Now it's, "The news is so disastrous, the worst must be over."

The news this past week was indeed disastrous:

The UBS writedown, announced early morning (Wall Street time) on Tuesday of last week, should have caused sensible investors to sell stocks and put the cash under their mattresses. But investors are not being sensible.

Most dramatic is what happened on Tuesday, April 1, right after the devastating UBS announcement: Wall Street markets rocketed up 3-4%.

The reasoning that I heard several times was this: "The UBS writedown was so big and so unexpected that it's clear it's a 'kitchen sink' writedown. They must have taken every possible writedown in the most conservative way. That means it's the end of it. The worst is over. In fact, the end of all the writedowns is in sight."

The implication of this bizarre reasoning is that if the UBS writedown had been less severe, then it would have been worse news, since it would have meant that there are more writedowns to come.

Instead, the news was SO bad that it can't possibly get any worse, and so the worst must be over.

Do you think I'm joking, Dear Reader? I assure you that I am not. The inmates are in control of the asylum.

Here's what Fritz Meyer, senior market strategist at AIM Investments, said on Monday morning on CNBC:

"I thought the market scored a very impressive victory last week, and that was because Tuesday's huge move was on what normally is considered to be very bad news for these financial institutions, UBS and Lehman. And when you finally see that, when you finally see the market trading higher on what should be bad news, it has typically marked a pretty important inflection, and so that's the way I viewed it."

Well, that's an interesting way to view it.

A similar view on Monday morning was that of contributor Jack Bouroudjian, CNBC's resident fanatic Pollyanna. He was asked whether he thought Friday was a good day for the stock market -- the Dow had lost only 16 points, despite the devastating unemployment report. His amazing response:

"It felt like a great day, didn't it? One thing that we said when that number came out, if you remember, that had this number come out a couple of months ago we would have seen those futures down significantly, it would have been a disaster, it would have been one of those 400 point down days for the Dow. But something seems to have happened -- there's been a shift over the course of the last week or so. We are starting to see money that's on the sidelines starting to come into market. And the real key for me is what happens with some of these European fund managers that I've been talking to."

Bouroudjian is stating the obvious: That all the bad news "felt like a great day." Why is that? Because the news was so bad, that the worst must be over. Since the worst is over, it feels good.

Now let me once again repeat a quote from John Kenneth Galbraith's 1954 book The Great Crash - 1929:

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

This is EXACTLY what's happening now.

The first time that I read this paragraph several years ago, I didn't really grasp what was going on, but now we can see it day after day. "What looked one day like the end proved on the next day to have been only the beginning." It's almost as if Meyer and Bouroudjian, the two people quoted above, were just copying their lines from Galbraith. What an INCREDIBLE situation!! These people are following the 1929 script as if it had just been written!

If you have a few minutes, take a look at my Dow Jones historical page. Look at what happened around the time of the 1929 crash, some of which is extracted here:

    1929: Daily change in Dow Industrials
    --------------------
    Mon 10-07 ( +6.32%)
    Tue 10-08 ( -0.21%)
    Wed 10-09 ( +0.48%)
    Thu 10-10 ( +1.79%)
    Fri 10-11 ( -0.05%)
    -------------------
    Mon 10-14 ( -0.49%)
    Tue 10-15 ( -1.06%)
    Wed 10-16 ( -3.20%)
    Thu 10-17 ( +1.70%)
    Fri 10-18 ( -2.51%)
    ------------------ 
    Mon 10-21 ( -3.71%)
    Tue 10-22 ( +1.75%)
    Wed 10-23 ( -6.33%)
    Thu 10-24 ( -2.09%) Black Thursday
    Fri 10-25 ( +0.58%)
    -------------------
    Mon 10-28 (-13.47%) Black Monday
    Tue 10-29 (-11.73%)
    Wed 10-30 (+12.34%)
    Thu 10-31 ( +5.82%)
    Fri 11-01  (Closed)
    -------------------
    Mon 11-04 ( -5.79%)
    Tue 11-05  (Closed)
    Wed 11-06 ( -9.92%)
    Thu 11-07 ( +2.61%)
    Fri 11-08 ( -0.70%)
    -------------------
    Mon 11-11 ( -6.82%)
    Tue 11-12 ( -4.83%)
    Wed 11-13 ( -5.27%)
    Thu 11-14 ( +9.36%)
    Fri 11-15 ( +5.27%)
    -----------------

Notice that the crash didn't just happen, and then everything went down from there. Notice that instead, the market spiked +6.23% just two weeks before Black Thursday, and it spiked +12.34% just two days after Black Monday.

If you go to the Dow Jones historical page, you'll see that the market went down almost continually until mid-1932, until it was down to just 10% of its peak value (on 3-Sep-29). But along the way, there were many days when the market spiked upward.

That's what's already happening, and that's what's going to be happening for the next 3-4 years. And those are the days when people like Meyer and Bouroudjian are going to go on CNBC and say that we're seeing a "pretty important inflection," and that it "feels good." Those are the days that people will say, "The market's finally going up again. Let me pour more of my savings into the market so that I can make all my money back." That's when politicians will say, "Prosperity is just around the corner."

That's what I've been calling the Principle of Maximum Ruin. As Galbraith says, "Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune." As in 1929, the market will ruin the maximum number of people to the maximum extent possible.

Let's not fool around. The news last week was disastrous, and there's absolutely no reason, except in the minds of those with financial sexual fantasies, to believe that the news will get any better.

As I've been saying for years, and summarized in "How to compute the 'real value' of the stock market," the market is overpriced by almost 250%, same as in 1929. It has nowhere to go but down, and it will go down, to the Dow 3000 range or lower. If it spikes up for one day or for one week, it still has to go down because it's way overpriced.

Finally, let's update our table of corporate earnings estimates. Each week, we add a line to the table indicating the estimates of first quarter corporate earnings as of that week.

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

"Earnings Central Stats, as of Friday, April 4th:

28 companies in the S&P 500 have reported earnings for Q1, 75.00% have beaten estimates, 10.71% were in-line, and 14.29% have missed. (Data provided by Reuters Estimates)

The blended earnings growth rate for the S&P 500 in first-quarter 2008, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -12.2% from -9.3%.

On January 1st, the estimated growth rate for Q1 was 5.7%. (Data provided by Thomson Financial)"

This allows us to add one more line to our table, as follows:

  Date    1Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct 23:             +10.0%
  Jan  1:              +5.7%
  Feb  6:              +2.6%
  Feb 29:              -1.1%
  Mar  7:              -4.3%
  Mar 14:              -7.8%
  Mar 21:              -7.9%
  Mar 28:              -9.3%
  Apr  4:             -12.2%

And here's a late flash: Monday is the first big day for announcements of actual first quarter earnings, and Alcoa Corp. announced a 54% FALL in earnings, well below analysts' expectations.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (8-Apr-08) Permanent Link
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Fed Chairman Ben Bernanke defends his Great Historic Experiment before Congress

The Fed-led rescue of Bear Stearns last week was closely questioned by the Senate Committee on Banking, Housing, and Urban Affairs on Thursday.

The questioners wanted to know why Bear Stearns was "bailed out," when foreclosed homeowners have not been bailed out.

The response from Fed chairman Ben Bernanke made the following points:


Sen Jim Bunning, (R) Kentucky, questioning at Senate Banking Committee
Sen Jim Bunning, (R) Kentucky, questioning at Senate Banking Committee

What I found to be the most interesting interchange in the hearings occurred when the questioner was Republican senator Jim Bunning of Kentucky, and Fed chairman Ben Bernanke responded (my transcript):

"Bunning: How did we get to the point that the failure of one firm can get us to the edge of collapse - all our financial markets. We know that the Fed did not do their job in regulating lending practices, supervising the risks banks were taking on. But how do you let the entire financial system become so fragile that it cannot tolerate one failure?

Bernanke: Well, one response Senator, is that this has been a long time in the making. There was a substantial credit boom that peaked last summer. That credit boom, which was driven by international factors that I could go into if you like, involved substantial increase in risk-taking, a lot of financial innovation, some of which turned out not to work so well, deterioration in underwriting standards, and essentially a letting down of the guard.

Supervisors made many efforts to address these problems. We were not successful obviously in preventing the excesses.

Starting in August, triggered by, but not, I would say, fundamentally caused by the subprime crisis, there was a sudden rethinking of the amount of risk that people were willing to take, there was a major retrenchment in the markets.


Fed chairman Ben Bernanke, testifying at Senate Banking Committee
Fed chairman Ben Bernanke, testifying at Senate Banking Committee

Now, in contrast to last year when investors were willing to lend against quite risky assets, now even the safest assets find difficulty in getting financed. And so financial conditions have become much more fragile, much more uncertain. There's a great deal of distrust of counterparties, of the valuation of assets. And there's a very strong aversion of taking risk -- of even liquidity risk, as opposed to credit risk.

As I mentioned earlier, under more robust conditions, under more normal conditions, we might have come to a very different decision, with respect to Bear Stearns. We felt that, given the context, given the fact that financial conditions are already creating a slowdown in our economy, that the risk was too great."

Bernanke here exhibits the same things that I've criticized in him for years. This is the person considered the world's greatest expert in macroeconomics, but he obviously has no idea what's really going on.

My first major criticism of Bernanke came in September, 2004, in "Federal Reserve congratulates itself on jawboning policy," and discussed at greater length the next month.

Bernanke was expressing the view that economic problems can be solved or contained by the wording used in written statements issued by the Fed. Bernanke apparently believes that the Fed can use verbal statements, even misleading verbal statements, to affect the economy -- stock prices, interest rates (bond prices), and so forth -- in the long run!

I can't overstate how incredulous I was and am at these statements. To say that verbal statements are controlling, and underlying fundamentals are irrelevant, is a statement so naïve that I'd expect it more from a teenager than from the Fed chairman.

As I've been pointing out for years, the fundamentals are that the 'real value' of the stock market is around Dow 5000, meaning that it's overpriced by roughly 250%. In addition, price/earnings ratios have been way above their historical averages since 1995, and so by the Principle of Mean Reversion, they'll have to far below average for a roughly equivalent period of time. As I've been saying since 2002, these fundamentals indicate that there must be a stock market crash to below Dow 4000, and that we're entering a new 1930s style Great Depression. In 2002, I estimated that this would probably happen in the 2006-2007 time frame. I thought we were close to it when the "credit crunch" triggered a worldwide financial crisis in August, 2007, and that crisis continues to this time, when a generational panic appears to be getting closer.

However, Bernanke continues to be completely unaware of these fundamentals. He doesn't explain what he means by "under more normal conditions," but he's clearly giving the impression that he means the time prior to August -- that is, the time of the credit bubble. That time was not normal, by any means.

Bernanke's "jawboning" policy, as explained in 2004, has been a total failure, obviously. The fundamentals have taken over. Does Bernanke believe that his jawboning concept is fundamentally wrong? Or does he believe that he simply hasn't been clever enough in his jawboning? He appears to believe the latter, and he certainly doesn't give any evidence that he understands the former.

Furthermore, as I wrote last year in "Ben Bernanke's Great Historic Experiment," and "Bernanke's historic experiment takes center stage," Bernanke is now putting into effect his master plan for avoiding another Great Depression. He is an expert on the 1930s Great Depression, and he has stated throughout his career that the 1930s Great Depression could have been avoided if the Fed had injected more liquidity into the financial system. This theory is based on a fundamental assumption that deflation is IMPOSSIBLE, because the central bank can prevent deflation by injecting liquidity. Bernanke held to that belief even in the 2000s, after almost a decade of deflation in the Japanese economy, following the Tokyo Stock Exchange's generational panic and crash that occurred in 1990.

Bernanke shows no evidence that he understands why this view is wrong, and how the credit bubble created tens or hundreds of trillions of dollars in new money that's now disappearing in the credit crunch, leading to a deflationary spiral.

Or maybe he has changed his views, and does understand this stuff now. Who knows? Maybe he's even read this web site. At any rate, he wouldn't want to say anything at this time, for fear of being identified throughout future history as the person who triggered the panic and the greatest financial disaster in world history.

There IS one thing that has changed about Bernanke: he's no longer The man without agony, which is how I described him in 2005. You can tell from his demeanor that he's FULL of agony these days.

Quite apart from Bernanke's lack of grasp of fundamentals, I was actually quite impressed with Bernanke's performance this week. He obviously had gotten almost no sleep at all, but still gave a very impressive political performance in front of the Senate committee.

The most important aspect of this political performance was his graceful refusal to take any political or ideological positions. He was asked several times to comment on the Administration's tax proposals, and his pointed response was always that tax policy is up to the Congress.

He even stared down Massachusetts senator Ted Kennedy, who came in for a few minutes to demand, in his usual fulminating style, tax recommendations from Bernanke. Bernanke refused, and Kennedy stomped off.

Rising star Timothy Geithner

Although Ben Bernanke was the star of the Senate hearing, the rising star was New York Federal Reserve President Timothy Geithner.


Timothy Geithner, New York Federal Reserve President, testifying at Senate Banking Committee
Timothy Geithner, New York Federal Reserve President, testifying at Senate Banking Committee

Geithner's grasp of fundamentals is no better than Bernanke's, but Geithner was able to promulgate his views very forcefully, staring down Senators, and sliding past inconsistencies very smoothly.

After Bernanke finished the testimony quoted above, Bunning asked if any of the other panelists had a different opinion. Geithner responded, leading to a confrontation between the two:

"Geithner: I don't have a different opinion, but let me just underscore -- in a market-oriented financial system, where people are free to fail, make mistakes, lose money, [[Bunning: I thought so]], make imprudent choices, any system designed that way is inherently vulnerable to the risk that a sharp loss of confidence in economic activity induces a dynamic, like we're experiencing now. This happens rarely, but it does happen. It happens across all different types of financial systems over time. But you're exactly right, and I think it is the critical objective for policy, the challenge for policy is to make the system strong enough so that it can withstand even the failure of large institutions.

But no system, in a situation this fragile, economically, is going to be able to withstand that easily, meaning withstand the risk of default by major debt easily.

What produced this is a very complicated mix of factors. I don't think anybody understands it yet. But we have to spend a lot of time and effort trying to figure out how to get a better handle on this stuff, and there's a lot of people who are going to be part of that, because it's very important that we try to make the system less vulnerable to this in the future.

Bunning: There were an awful lot of red flags. Not just in the last six weeks. Not just in the last month. But in a year or two before, that we were having some problems in our mortgage markets.

We were having mortgages made that shouldn't be made. That the mortgage brokers were soliciting people into mortgages that they couldn't afford, and finally they knew were doomed to failure. Nobody was watching the store, so it was eventually going to happen.

It just happened to be Bear Stearns who got a hold of all these things in one week. And the crisis occurred when everyone said, watch out for Bear Stearns because they're not going to wind up this week anywhere but in bankruptcy. I mean that's what they came and told the Fed. Am I wrong? Didn't they come and tell you that they were going to go belly up, and they asked for help?

Geithner: Senator, let me just step back for one sec, and go back a bit.

The people at this table, and the supervisors and regulators, took a lot of actions over several years to try to make the system less vulnerable to this kind of event.

Bunning: I'm sorry, I've been here too long to try to convince me of that.

Geithner: I'm not claiming to be trying to convince you, but I just want to ...

Bunning: You're not going to be able to convince me because the red flags have been waving long before you showed up at that table. [Q looked away in disgust, and there was a long pause.]

Geithner: Should I try ... Could I just go through a few important things for the record?

Bunning: Certainly, go ahead.

Geithner: We did, working with the SEC, and the other major supervisors, the other major institutions around the world, a series of very important things, beginning in 2004, in particular, focused on exactly the set of risks that are so pronounced today.

These things focused on strengthening ...

Bunning: The problems go before 2004.

Geithner: I, I ...

Bunning: It goes back to 2000, 2002, and on down.

Geithner: I'm not claiming that people were wise and all-knowing, or that we did everything that could have been done. But I just want to underscore the fact that we took a series of actions that tried to make the system more resilient to this kind of stress, and those things have made a lot of difference.

The system would have been more fragile without those things. As the Chairman said, they did not achieve enough traction in areas where we would have liked them to achieve more, and we are going to be very focused on how to deal with those things in the future, but it's going to require a very comprehensive effort, because we don't have the incentives in the system, aligned with ...

Bunning: You've talked me out of my time, but the biggest problem with that is that I get the last say. What's going to happen if a Merrill or a Lehman or someone like that is next?"

This question was left unanswered, although I would have loved to hear Geithner's answer. I doubt that he'd have any answer beyond "everything will be fine."

Shallow reasoning

All in all, this testimony shows what an incredibly shallow understanding of what's going on these people have. Geithner talks about stuff the Fed did since 2004, and Bunning replies (paraphrasing), "You're full of crap. This problem began in 2002. By 2004, it was already too late."

It's just incredible how shallow this reasoning is, although this is just a reflection of how shallow mainstream macroeconomics is.

Let's mention again that mainstream macroeconomics has not gotten anything right at least since 1995. It doesn't predict or explain the dot-com bubble of the late 1990s, it doesn't predict or explain the global collapse in interest rates in the early 2000s (Alan Greenspan's "conundrum"), and it certainly didn't predict anything that's going on now. Mainstream macroeconomics has been completely baffled by the credit crunch, since it began in August, and has no explanation other than Bernanke's, that there was "a sudden rethinking of the amount of risk that people were willing to take." Mainstream macroeconomics did not predict or explain when that "rethinking" occurred, other than Alan Greenspan laying the blame on animal spirits.

The fashionable explanation of what's happening today is that it was caused by Alan Greenspan, who lowered interest rates too much, causing the housing and credit bubbles and the subprime crisis.

This doesn't even make sense, as the housing and credit bubbles were worldwide, and occurred through Europe and Asia, even including China. Other than by pure guesswork and wishful thinking, there's no rational way to connect all these things together.

The housing bubble was caused by massive fraud throughout the entire financial and real estate industries, from top to bottom, whether it was homeowners lying on their applications, construction firms colluding with appraisers and brokers to get kickbacks by over-valuing homes, lenders who resold mortgages without checking any of the claims, lenders who adopted predatory lending practices, granting loans to people with no hope of making payments, investment banks that securitized loans based on the assumption that real estate prices would rise forever, ratings firms and monoline insurers that took fat fees to lie about these potentially worthless securities.

How is it possible that this rot, this blight, this depravity, this debauchery permeated EVERY financial institution at EVERY level, without almost any exception? This debauchery was caused by the Alan Greenspan's low Fed Funds rate? That simply doesn't make sense.

It's astonishing to me that these people at the Senate hearing argued whether the problem began in 2004 or 2001, and none of them even thought to consider the problem of the dot-com bubble of the late 1990s. Is it possible that these people are so clueless that they think that the dot-com bubble is totally unrelated to the credit bubble? Could they possibly believe that two major bubbles occurring in close succession have nothing to do with one another? Apparently so. The stupidity of these people is monumental.

And why did the dot-com bubble begin in 1995 rather than, say, 1990 or 2000? Did the Fed cause that too? That question wasn't even broached.

There's only one credible explanation for all of this: The Great Depression survivors all retired in the early 90s, and when the oblivious Boomers took over as senior managers, they ignored all those "old rules" about credit and created the dot-com bubble. Then, nihilistic Generation-X reached their 40s in the early 2000s, and created the fraudulent financial engineering models and structures that are disintegrating today around the world.

I think that it's funny that Alan Greenspan last year blamed the housing bubble on the fall of the Berlin Wall, and now he's blaming the credit crisis on "animal spirits." However, he did not cause and could not have caused, the problems we're seeing today. Those problems were caused by the massive corruption, depravity and debauchery that permeated every level of every institution of the financial industry. If this corruption had occurred in only a few institutions, then some other explanation might be possible; but the corruption was spread through EVERY financial institution, from top to bottom, and that can ONLY have a generational explanation.

Let's make a list of some of the major things that the people at the Senate hearing were completely clueless about:

How stability creates instability

Finally I want to return to two important sentences in Geithner's testimony:

"But I just want to underscore the fact that we took a series of actions [since 2004] that tried to make the system more resilient to this kind of stress, and those things have made a lot of difference. The system would have been more fragile without those things."

Well, if the system has become increasingly unstable since 2004, especially in the last year, then how could he claim that the system is more resilient?

When the credit crunch began last August, I really expected a major chain reaction and crisis within two or three months, as I wrote at the time. I've been amazed, since then, in watching the wide variety of awe-inspiring measures that the Fed has taken, often in conjunction with other central banks around the world, to stave off immediate disaster.

The problem is that none of these measures does anything to fix the problem (which can't be fixed anyway). Each of these measures is a stopgap that fixes one particular problem. Meanwhile, the entire system is degrading further each week, and each crisis is always worse than the preceding one. Eventually one of stopgap measures must fail.

Bernanke himself seemed to be hinting at this during the hearing when he expressed his own amazement at how quickly Bear Stearns melted down, from being a solid company on Wednesday, March 12, to be on the verge of bankruptcy 24 hours later.

It doesn't take much imagination to see that the same thing could happen in a more widespread manner, and could affect several financial firms simultaneously, with no hope of a "quick fix" as happened in the Bear Stearns case. Bunning hinted at this when he asked his final question: "What's going to happen if a Merrill or a Lehman or someone like that is next?"

This illustrates the principle of how stability breeds instability. Geithner claims that actions taken since 2004 have made the system less fragile, but all he's done is postpone the inevitable, almost certainly making the inevitable result worse.

At some point, the credit bubble had to burst. All the Fed can do is try to keep it from bursting right away.

Once again, I quote the following passage from John Kenneth Galbraith in his 1954 book, The Great Crash - 1929:

"A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated. (For nearly a decade the Federal Reserve authorities had been denying their responsibility for the deflation of 1920-21.) The eventual disaster also had the inestimable advantage of allowing a few more days, weeks, months of life. One may doubt if at any time in early 1929 the problem was ever framed in terms of quite such stark alternatives. But however disguised or evaded, these were the choices which haunted every serious conference on what to do about the market." (p. 25)

This is all that the hearing's about. There's one thing that I do wonder about: How many of the participants in this hearing understood what a farce it was, but were just playing along for political purposes, versus the rest, who were there because they actually believed that something useful was going on? Enquiring minds want to know.

There will be more hearings, and more proposed laws, and more regulations, and they'll all be as completely irrelevant as Thursday's meeting was.

It's obvious that these people have no idea what's going on, and that these meetings have only one purpose, as even the participants probably know: Determining who's going to be blamed for what happens.

Right now, the person most likely to be blamed is Ben Bernanke. He's the expert on macroeconomics in general, and on the 1930s Great Depression in particular. My guess is that he's not getting much sleep any of these days, and that he's probably going through a severe clinical depression (I'm not joking!).

However, his demeanor these days, and the aggressiveness of his actions as Fed chairman, are really quite impressive. He is pursuing his "Great Historic Experiment." It's completely failed so far, and has no chance of succeeding, but if he can pursue his Experiment convincingly enough, then when the axe falls, he may manage to have it land on Alan Greenspan's neck instead of his own. (7-Apr-08) Permanent Link
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Pakistan's tribal areas have become the world nerve center for al-Qaeda terrorism

Al-Qaeda now has "free reign" and "safe haven" in this region.


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

Pakistan's Federally Administered Tribal Area (FATA) has played an increasingly important role in the spread of al-Qaeda's terrorism throughout the world.

According to CIA director General Michael Hayden, appearing on Meet the Press on Sunday, March 30:

"But it's very clear to us that al-Qaeda has been able, over the past 18 months or so, to establish a safe haven along the Afghanistan-Pakistan border area that they have not enjoyed before, that they are bringing operatives into that region for training, operatives that, a phrase I would use, Tim, wouldn't attract your attention if they were going through the customs line at Dulles [airport] with you when you're coming back from overseas."

The following is the portion of the interview dealing with the Pakistan question:

Al-Qaeda's goal has been, and continues to be, to trigger a war in some nation, creating an Islamic state, as happened in Iran in 1979. They've failed to do so in Iraq and Saudi Arabia, and they're still actively trying in Pakistan and Afghanistan. Their control of Pakistan's FATA is a major stepping stone in the achievement of that goal.

The FATA region is administered by Pakistan, but is not controlled by Pakistan. In 2006, Pakistan's president Pervez Musharraf made a deal with the FATA tribal lords, where Pakistan's regular armed forces would withdraw, leaving the FATA groups to police themselves. Hayden was asked whether this agreement was a mistake for Musharraf:

"Absolutely disastrous. All right? And then, and then, and, look, to be fair to President Musharraf, in different times and in different circumstances, all of us would think that what he had, what he had decided to do was wise, was patient, was, was what you need to do over the long term. The problem was what was happening over the short term. He, he was, in fact, pulling forces and the writ of the Pakistani government back from the tribal region, and al-Qaeda and the Taliban were having more and more free reign there. And so, again, the overall objective, you know, in the easier military hand--more economic, cultural, political integration, investment, worked for the long term, it's inarguable. But what it turned into since September of '06, when Governor Aurakzai signed that peace agreement in north Waziristan is what I referred to a minute ago. It created that safe haven."

This answer is interesting from the point of view of Generational Dynamics he says that "in different times," the agreement might have worked. Those "different times" would be a different generational era, not the generational Crisis era of present day Pakistan.

This is another example, among several that I've noted on this web site, where politicians have made substantial policy errors that they would not have made if they understood generational theory. (6-Apr-08) Permanent Link
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China "betrays" Iran, as internal problems in both countries mount

Diplomats say that China has provided Iran's nuclear weapons plans to the UN.

In a surprising move, China appears to be cooperating with the UN's International Atomic Energy Agency (IAEA) in its investigation of Iran's nuclear development plans, and has provided it with Iran's nuclear plans. The exact nature of the information hasn't been made public, but it's believed to be related to the development of nuclear weapons and associated missile delivery systems.

China's change of heart may have occurred because China was caught red-handed. Documents confiscated from Iran in February by the IAEA indicate China was supplying Iran with information on manufacturing nuclear-armed weapons.

Several web site readers have written to me expressing concern that the Bush administration is about to invade Iran. These fears have been fostered by Iranian president Mahmoud Ahmadinejad, as well as by paranoic journalists, led by Seymour Hersh, who believes that the American armed forces are Nazi thugs. Hersh, in particular, has been building a career for several years out of predicting an imminent American invasion of Iran.

This story of China's supposed "betrayal" of Iran gives us an opportunity to do a generational analysis of the relationship between China and Iran.

On this web site, I've done generational analyses of the strategies of different countries. In this case, we'll be attempting a comparative strategy. This exercise is of theoretical interest to generational theory because Iran is in a generational Awakening era, while China is entering a generational Crisis era.

In particular, we want to speculate on Iran's place in the coming world realignment. Readers may have noticed that I talk about a new "axis," consisting of China, Pakistan, Bangladesh and North Korea, versus the "allies," America, the UK, Russia, India and Japan, but that Iran is conspicuously missing from both the "axis" and "allies" list. We'll explore the meaning of China's "betrayal" of Iran on that question.

We will focus on the following four issues:

China's strategy

China is entering a generational Crisis era, and has been almost coming apart at the seams for a few years. China is headed for a secular civil war, as I wrote in 2005. In March, 2007, Chinese premier Wen Jiabao said that China is "unsteady, unbalanced, uncoordinated and unsustainable."

It's hard to overestimate the increasing severity of China's internal problems in recent weeks and months:

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Escalating civil war in Yemen threatens to pull in Iran, Saudi Arabia and U.S.: Last week, President Obama said we would help Yemen in its "fight against terrorism,"... (13-Sep-2009)
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Everything in China is geared toward the summer Olympics games. When the games end, there will be an enormous letdown. We will have to see how China reacts to the above list of crises at a time when it no longer cares what the world thinks.

As the world approaches the Clash of Civilizations world war, China is going to be allied with Pakistan and Bangladesh against India and Russia in central Asia. It's very hard to see how Iran fits into that picture.

Iran's strategy

Unlike China, which is in a generational Crisis era, Iran is in a generational Awakening era, since only one generation has passed since the genocidal Islamic Revolution in 1979, followed by the Iran/Iraq war in the 1980s. This means that Iran's "mood" is significantly different from China's "mood," which would make it very hard for them to understand each other's motivations.

As we described last year, "Iran's President Ahmadinejad is facing a growing 'generation gap,'" as he pursues an Awakening era strategy:

The best that can be said about Ahmadinejad's policies is that they've been irrational. There is absolutely no way that the Sunni Arabs or Taliban will ever permit themselves to be governed by Shia Iran. Hamas is willing to take Iran's money and Iran's weapons, but when choices must be made, Hamas will never choose Iran as their leaders. In other words, Ahmadinejad is simply wasting his money.

Nonetheless, Iran remains a dangerous wild card in the Mideast, as Ahmadinejad becomes about as unpopular in Iran today as Richard Nixon was in the 1960s and 1970s America.

Iran's relationship with China

Comparing the strategies of two countries that are at different points in the generational timeline has been an interesting exercise from a theoretical point of view, because it illustrates how incongruous the "moods" of the two different countries are.

If you read through the strategies of China and Iran in the previous sections, it very quickly becomes clear that they have almost no strategic goals in common -- except a general wish to oppose the United States ("the enemy of my enemy is my friend").

The contrast between Iran and China can be demonstrated by both countries' relationship with Pakistan:

Now add a potential Iranian nuclear weapon into this mix, and you really see the problem: Iran would like to have nuclear capabilities in order to be a regional superpower, and paranoid China would fear that Iran will give nuclear weapons to al-Qaeda terrorists.

So, China didn't really "betray" Iran, because there are really no common interests to betray. China was willing to support Iran's nuclear development as long as doing so simply annoyed the West, but that support stops when China's own interests are at risk.

Iran's relationship with America and the West

Whenever I've talked about Iran on this web site, I've always mentioned how the country is an internal contradiction. The government and mullahs are anti-American and anti-Israel, while the people, especially the young people, are much more pro-Western, and really don't have anything against Israel. In fact, young Iranians are probably much more politically opposed to the Iranian government than to the American government.

From the point of view of Generational Dynamics, when I analyze any country, I always have to focus on the attitudes and behaviors of the great masses of people, not on the attitudes of a small group of politicians. And so I have to conclude that since young Iranians are generally pro-Western, it follows that Iran is going to be pro-Western when a choice is forced upon them. This is not a sure thing at this point, but the trend is definitely in that direction.

As the "Clash of Civilizations" world war approaches, and Iran is forced to choose sides, their initial choice will be to stay out of it as long as possible. This means that they'll avoid the use of their own army, and they'll try to keep the war off Iranian soil. If a choice is forced, I think it's more likely to be an alignment with the West.

What about the original question: Is America about to attack Iran?

I read the same news stories that everyone else does, and I see no evidence of it. If there were any preparations going on, the New York Times and the BBC would be all over it.

When writing about China in the preceding sections, I used words like "paranoia," "anxiety" and "panic" in describing China's mood.

The same words can be used to describe America's mood and Israel's mood. On the one hand, you have the paranoic reporters talking about an imminent invasion. On the other hand, you have the possibility that anxiety and panic will lead to some kind of bombing attack on Iran's nuclear facilities, just as panic led Israel to declare war on Hizbollah in Lebanon in 2006.

We can't predict the actions of individual politicians, so the most we can say is this: The reasons given by those reporters who are claiming that an attack is imminent are completely wrong; if an attack does occur, it will be a panicked reaction to Iran's perceived nuclear buildup.

That's speculation. What is certain, however, is that China's so-called "betrayal" of Iran reveals cracks in their relationship that will not be healed any time soon. (5-Apr-08) Permanent Link
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The new Iraqi "civil war" fizzles out, as expected

Radical Shia cleric Moqtada al-Sadr called for a cease-fire on Sunday, bringing calm to most of the streets of Basra in southern Iraq.

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The chaotic Iraq election is only two days away: The election is on Sunday, January 30, and no one has a clue what's going to happen.... (28-Jan-05)
Brent Scowcroft predicts an "incipient civil war" for Iraq: Pundits are returning to wishful thinking as the January 30 election approaches... (09-Jan-05)
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The BBC really played up the violence last week, with frequent comments about the danger of increasing violence, a new "explosion" into a return to sectarian violence and possible civil war.

As I've been saying since 2003, Iraq is in a generational Awakening era, just one generation past the genocidal Iran/Iraq war of the 1980s, and so a civil war at this time is impossible or, if one begins, then it fizzles quickly. That's what happened again last week.

Pundits are really puzzled about what happened. The violence has been portrayed as pitting the Iraqi army, with Prime Minister Nouri al-Maliki at its head, versus the Shia al-Mahdi army, with radical Shia cleric Moqtada al-Sadr at its head.

According to the pundits, al-Sadr's army was beating the Iraqi army hands down. It was a totally uneven battle. And yet, al-Sadr is the one who sued for peace. The pundits are wondering, "What's going on?"

This gets to the heart of what an Awakening era is. A year ago, in "Iraqi Sunnis are turning against al-Qaeda in Iraq," I explained at length, quoting numerous sources, that Iraqis did not want to fight, and that Sunni Iraqis were turning against al-Qaeda in Iraq, which was essentially an invading force of terrorists. Of course, we now know that the Sunni Iraqis have thrown out al-Qaeda in Iraq in the "Anbar Awakening" that accompanied the "surge" in American forces.

So it shouldn't be very strange that we're now seeing the same thing on the Shia side. What you have are young 20-25 year old kids, unemployed and living in slums, joining the Shia militias because they can hardly wait to go out there and kill someone. But then you have their 40 year old mothers. Their mothers lived through the horrors of the Iran/Iraq war, and they're absolutely sick of war. They're telling their sons, "Look, your father was tortured and killed in that war. My brother, your uncle, was burned to death. I don't want you getting tortured and killed. Stay out of it."

That's the kind of thing that happens during an Awakening era, and it's why there are so few serious wars fought during those eras.

As if to prove my point, here's an article on the ceasefire:

"Basra fight turns political, Published: March 31, 2008 at 3:34 PM

BAGHDAD, March 31 (UPI) -- A Sadrist lawmaker said the Iraqi curfew enacted to quell recent violence created a humanitarian disaster amid inter-political wrangling over the shaky truce.

Falah Shinishel with the Sadrist Movement said residents in Basra and Baghdad under the curfew suffered from a "dire shortage" of food and medicine and blamed the Iraqi government for continuing the curfew "for unrealistic reasons," Voices of Iraq said Monday.

The spokesman for the Iraqi government, Ali al-Dabbagh, said intelligence suggesting militants were planning a large-scale operation against residential areas prompted a decision to impose an extended curfew on vehicle traffic, though the government lifted the general curfew.

"Terrorist groups are trying to exploit the current situation, and target the residential (areas)," Dabbagh told VOI. ...

Do you get it? Al-Sadr's militias might have won. Instead, the Iraqi government won the war by enforcing a curfew!! Why fight a war, when all you have to do is declare a curfew? That's what happens in an Awakening era. Question: Why don't they just call a curfew in Darfur? Answer: Because it couldn't possibly work there, because that's a Crisis war.

I said there would be no civil war in Iraq, and there was no civil war in Iraq. I said that the Darfur civil war was unstoppable, and the Darfur civil war has been unstoppable. In country after country, and region after region -- Iraq, Iran, Sudan (Darfur), Israel, Gaza, Lebanon, Japan, Burma, Kenya, China / Tibet, etc. -- I've made predictions that have come true or are trending true - none has been shown to be false. In the past five years, I've written two books and posted 981 articles on this web site, all of which can still be read by anyone who wants to go back and check what I've said. No pundit would ever challenge people to do that, but I do.

You know, Dear Reader, the sheer absurdity of what's going on is never lost on me. I sit here obsessively, alone in my apartment, in front of my computer, usually late in the evening, and use this apparently god-like power to decide what's going to happen in finances and in countries around the world -- Kenya, Lebanon, Iraq, etc. -- and everything I predict comes true, and I'm the only person in the world doing this. (A couple of years ago, someone in a forum suggested that I was actually CONTROLLING world events. I had a good laugh over that.)

Government officials, high-paid analysts, highly respected journalists, politicians and pundits have no idea what's going on in the world -- or at least when they make predictions, their predictions turn out to be wrong half the time. They don't seem to have a god-like power like I have.

There's no god-like power, of course. It's a good thing I'm not a religious person, because if I were I'd really be confused about what's going on. But I know that it's all generational analysis that I'm always explaining on this web site. Once I do a thorough generational analysis of a country, I know a great deal about what's going to happen there. And it's getting so easy for me, now after my two books and 981 articles. Iraq, Iran, Kenya, Burma, whatever -- at this point I can read a news story or intelligence report about what's happening in any country that I've analyzed, and I immediately can tell whether the news story is significant or not, and what it's probably going to lead to. Other people have to guess or scratch their heads, but I seem to know right away.

If I could get a sponsor interested, within a year I could create a computerized "world model" that would have highly predictive capabilities about any country or region in the world. This product would have plenty of applications in commerce and government, but whenever I propose it to anyone I just get blown off.

This latest Iraq situation has really affected me. When the Basra violence broke out last week, I immediately knew that the mainstream media would play it up, that the mainstream media would be wrong, and that the violence would fizzle before too long. That's what happened. It's gotten so easy for me. Everything I predict comes true, and I'm the only person in the world doing this. There's barely a moment that goes by when I don't just shake my head and ask myself, what the hell is going on? How the hell is this happening? It's absurd and scary.

The traffic to this web site has been growing recently, and based on the web logs, I estimate that I now have well over 5,000 regular readers.

I know from the e-mail messages that I get that many of you are anxious and scared about what's going on in the world, and you come to this web site because it's the only one that tells you what's actually going on, so that you can prepare for it. Nobody in 2003 would have told you that we're headed for a new Great Depression, but I did on this web site. Nobody in 2003 would have told you that the Mideast peace plan would fail, and that a new genocidal war between Arabs and Jews is certain, but I did on this web site. Over and over again, people who want to prepare for what's coming have turned to this web site to get some guidance.

(See "List of major Generational Dynamics predictions" for more information.)

As I always like to say, you can't stop what's coming, any more than you can stop a tsunami. You can't stop it, but you can prepare for it. Treasure the time that you have left, and use it to prepare yourself, your family, your community and your nation.

I want you to know, Dear Reader, that when I first began this web site in 2002, it was an interesting experiment, but today I take my responsibility to this web site very seriously. Mainstream journalists, analysts and politicians have massive conflicts of interest, and often will lose their jobs unless they always say that things will be better or unless they support some political position.

I have no conflicts of interest whatsoever, except to maintain my own credibility. And that's why I always adhere strictly to the Generational Dynamics forecasting methodology that I've developed, and which has never failed me yet.

However, one reason I went into all of this is because I want to make a point to those of you who are scared to death about what's coming: I'm just as scared as you are, probably more scared. It's just that I handle being scared differently from you. I handle it by obsessively posting Generational Dynamics predictions on my web site, which is not something that other people do.

As always, I thank the ever growing readership of this web site. I'm still keeping up with answering e-mail comments and questions, though it sometimes takes me a few days to get back. If you have any questions or comments, you can use e-mail or one of the little "Comment" forms. Also, it's not hard to find my phone number on my web site if you look for it. I'm not inviting a million calls, and I don't have anything to offer but an ear and a little counsel, but that resource is available to you if you want it. We're really all in this together. (1-Apr-08) Permanent Link
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Web Log - January, 2011
Web Log - December, 2010
Web Log - November, 2010
Web Log - October, 2010
Web Log - September, 2010
Web Log - August, 2010
Web Log - July, 2010
Web Log - June, 2010
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Web Log - April, 2010
Web Log - March, 2010
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Web Log - December, 2008
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Web Log - December, 2007
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Web Log - December, 2004
Web Log - November, 2004
Web Log - October, 2004
Web Log - September, 2004
Web Log - August, 2004
Web Log - July, 2004
Web Log - June, 2004


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