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 Forecasting America's Destiny ... and the World's


Web Log - June, 2009


Ayatollah Ali Khamanei relives his childhood, as Iran arrests UK Embassy employees

Following a week of massacres, protestors have taken to the rooftops, where they chant "Allahu Akbar" (God is great). The chants can be heard across Tehran every night around 10 pm, in defiance of the Islamic regime.

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Unfortunately, the protestors still aren't entirely safe from violence by the Revolutionary Guards and the Basiji militia who "are carrying out brutal nighttime raids, destroying property in private homes and beating civilians in an attempt to stop nightly protest chants," according to Human Rights Watch.

In some ways, what happened on Saturday is the most bizarre event of all, as Iran arrested nine people in the British embassy in Tehran.

I've written dozens of analyses of Iran on this web site in the last six years, and I've always emphasized one thing: That Iran's domestic and foreign policies are ALWAYS geared toward recapturing the "spirit" of the Islamic revolution of 1979. The regime has seen this "spirit" erode year after year, as Iran enters its generational Awakening era, and young people born after the revolution make their voices heard.

One of the major events of the 1979 revolution was the Iranian hostage crisis:

"The exiled Ayatollah [Ruhollah] Khomeini returned to Tehran in February 1979 and whipped popular discontent into rabid anti-Americanism. When the Shah came to America for cancer treatment in October, the Ayatollah incited Iranian militants to attack the U.S. On November 4, the American Embassy in Tehran was overrun and its employees taken captive. The hostage crisis had begun."

The hostage crisis lasted 444 days, and was a major international event. It dominated American news for the entire period, and is thought to be the reason that Jimmy Carter lost to Ronald Reagan in the 1980 Presidential election.

Ayatollah Ruhollah Khomeini lead the Islamic Revolution, and was the first supreme leader of Iran's Islamic state.

Today's supreme leader, Ayatollah Ali Khamenei, is reliving his childhood by the bizarre act of arresting British Embassy employees. Yes, Khamenei was 40 years old in 1979, and not exactly in his childhood, but today's actions can best be described in that way.

From the point of view of Generational Dynamics, there isn't a snowflake's chance in hell that this will work. What works in a generational Crisis era does not work in a generational Awakening era. The youthful protestors, who are largely pro-West and pro-American anyway, will see through this as a shallow political ploy.

Meanwhile, Khamenei and Iran are being strongly condemned by the UK and the European Union, and the EU warned of a "strong and collective response," unless the employees are released.

Who is worse: Ali Khamenei or Richard Nixon?

This question is prompted by a message from an online correspondent:

"I agree with you that Khamenei could end up humiliated (or dying), but so too will Rafsanjani and most of the older clerical establishment within the next few years.

Ironically Ahmadinejad right now aside from being hated by the North Tehran Gucci crowd has more popular legitimacy than any other figure, including among the young Basiji. I suspect the import of the [Arab] Hezbollah folks is for having a more battle hardened cadre to inspire/train the young Basiji, although the Twitterers have claimed that it¹s because the Iranian troops are hesitant to attack the protesters.

For the record, I am convinced that Ahmadinejad actually won the election (maybe not by 63%, but he won nonetheless and the quick vote count is a total red herring; there are only 850 ballots per voting station) and that [opposition candidate Mir-Hossein] Mousavi is really at best a [former Senator George] McGovern figure, but probably less significant than that. Mousavi could be coopted somehow, but really his wife is the one with a following.

Let a few more years go by and power of the younger generation will grow, both of the North Tehranis and the rural/urban poor folks. My Iranian friends here in Vancouver reluctantly agree that there is an urban/rural + rich/poor split being revealed; but both are opposed to the clerical establishment."

Senator George McGovern was the Democratic "peace" candidate running against Richard Nixon in America's 1972 Presidential election. McGovern lost 49 states to Nixon, and was rarely heard from again. However, once the election was over, Nixon was immediately embroiled in the Watergate scandal, and was forced to resign in 1974.

Comparing McGovern to Mousavi is a very interesting insight, and it leads to an equally interesting question: Who was the worse leader in a generational Awakening era, Supreme leader Ali Khamenei or President Richard Nixon?

Khamenei appears to be much worse than Nixon was. Nixon's peace plan may not have satisfied the protestors, but at least he ATTEMPTED to compromise and buy time. But Khamenei's "Fuck you, take it or leave it and die" attitude, combined with his willingness to spray bullets into crowds of peaceful protestors, is a disaster in a generational Awakening era.

At the top level, an Awakening era is never anything more than a conflict between the Prophet generation (the first generation to grow up after a crisis war) and their parents.

There's little doubt that the young Basiji paramilitaries support Ahmadinejad's presidency, but I haven't read anything that would lead me to believe that a young Basiji who favors Ahmadinejad over Mousavi is willing, on a sustained basis, to beat and club and shoot to kill other young Iranian men and women, just because they favor Mousavi over Ahmadinejad. This is particularly true in an Awakening era.

In 1970, members of the Ohio National Guard fired at student protestors at Kent State University, killing four of them. The Kent State shootings were a disaster for the Nixon administration, and I expect the murder of Neda and other student protestors in Iran will be a disaster for Khamenei. There's a real possibility that Khamenei will be humiliated and forced to step down within a few weeks.


I apologize to my readers for having so few postings lately, but my mind has been a total blank. I can't get excited about writing about anything. I've covered the Iran situation. There are new suicide bombings in Pakistan, but I have nothing new to say. The financial crisis is deepening, but on the surface everything looks great. The world is drifting along in a "steady state," waiting for something to happen.

Is this the calm before the storm? That's the real question, since there's so much going on, in Iran, in Iraq, in China, in North Korea, in Pakistan, in India, in Gaza, and economies from Latvia to China are collapsing. But it's all just below the surface, while the surface seems calm.

Will the calm extend through the summer into the fall? Or will some chaotic-type event break through sooner than that?

(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (28-Jun-2009) Permanent Link
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Iran's Khamenei appears desperate, as reports of Tehran massacres grow

An amazing generational battle is proceeding in Iran.

As I wrote a couple of days ago (see "A generational explanation of Iran's political crisis"), 80-year-old Khameni is in the Nomad generational archetype, an older version of America's Gen-Xers.

And what we're seeing in Iran can only be described as the same nihilistic, destructive, self-destructive behavior that characterizes many people of the Nomad generational archetype.

Supreme leader Ayatollah Ali Khamenei has vowed that the government will not yield to the demonstrators.

Khamenei could be looking for a way to defuse the situation with a compromise, such as committing to give Mir Hussein Moussavi, the reformist candidate who lost to Mahmoud Ahmadinejad in the recent election, a high-ranking position in the government.

Or, Khamenei could buy some time by launching an investigation on the election, and keep it going for 2-3 months, to allow passions to cool.

Instead, Khamenei has adopted the harshest possible policy at every step along the way, starting with his declaration, long before the ballots could have been counted, that Ahmadinejad the winner of the election, and authorizing increasing violence against even peaceful protestors.

The policies adopted by the Khamenei government appear to be increasingly desperate. The sheer size of the anti-government demonstrations has decreased, but public opinion seems to be turning increasingly against Khamenei.

Khamenei has shut down mainstream media reporting out of Tehran, but news organizations have been receiving a steady stream of reports in the form of e-mail and twitter messages.

A good way to follow these messages is to read one of the "live blogs," such as the New York Times live blog or the Guardian live blog. (Unfortunately, in each case you have to find the new URL every day.) These blogs contain the text of messages, translations of statements on Iranian web sites, and YouTube videos.

As the blogs themselves mention, many of these messages cannot be confirmed, and some people are complaining that the western media may be exaggerating the violence. The problem with that complaint is that Khamanei himself is encouraging the perception of increasing violence by his hardline statements. At this point, the perception is so pervasive that Khamenei's government is massacring its own citizens, that it really doesn't matter whether hundreds of people have been killed by gunfire, or only dozens.

What Khamenei's nihilistic policies have accomplished is to destroy the government's credibility at home and abroad, and turn many Iranians against the government. Many of the live blog reports indicate that splits within the government and even within the militia. For example, a number of Mousavi allies have been arrested.

There's one particular angle worth noting. A number of reports indicate that the government has augmented its militia with Arabs from other countries, acting as mercenaries. If this is widespread, it would indicate that the Iranian soldiers do not want to beat and fire on their own people, which would not be surprising during a generational Awakening era. It's reminiscent of al-Qaeda in Iraq, which was never able to recruit Iraqis to serve as suicide bombers, and had to import them from Saudi Arabia and Jordan.

Many analysts are expecting the demonstrations and protests to fizzle now, just as they fizzled in China, after the Chinese army slaughtered hundreds or thousands of unarmed protestors in Tiananmen Square in 1989. But the Tiananmen Square massacre occurred 40 years after the end of the previous crisis war (the Communist Rebellion, climaxing in 1949), and so the Tiananmen Square demonstrations would have fizzled within a few days if the Chinese authorities had done nothing.

These political protests and demonstrations reach their maximum power roughly 20-25 years after the end of the preceding crisis war. That was the time of America's 1967 Summer of Love and the 1968 riots and police riots at the 1968 Democratic National Convention in Chicago. And that's where Iran is today, 21 years after the climax of the Iran/Iraq war.

So the comparison which many analysts are making to the Tiananmen Square massacre is not valid.

Because of his nihilistic willingness to adopt the very harshest possible policies, there appears to be no way that Khamenei can survive this crisis politically. If he were capable of finding a compromise or buying time, then he might survive. But this is how Greek tragedy works -- the final tragedy comes about because it has to, because the participants can't stop themselves from bringing it about.

As I understand it, Iranian students across the country are taking standardized exams on Thursday and Friday of this week. Thus, Saturday and Sunday may provide the next major test of the Khamenei administration.

Whatever happens, I hope that readers of this web site realize what an exceptional opportunity we have to be able to watch this Awakening era drama in Iran in real time. This is an amazing time in Iran, and there will be many more amazing days to come this summer.

(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (26-Jun-2009) Permanent Link
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A generational explanation of Iran's political crisis

What happens when an irresistible force meets an immovable object?

There have now been two really exciting international events for Generational Dynamics this year.

The first was the end of the Sri Lanka crisis civil war. We got to see and analyze the climax of a crisis civil war as it's happening in real time.

Now we get to see a "Summer of Love." type Awakening era event as it's happening in real time in Iran.

The comparison with America's Summer of Love Awakening era event in 1967, along with the 1968 riots at the Democratic National Convention in Chicago, is very apt. Although the sequencing and details are different, the generational behaviors and attitudes are almost identical.

First of all, Iran's protestors are like America's Boomers -- that is, they're in the Prophet generational archetype, the first generation growing up right after the end of a crisis war. America's Boomers grew up right after World War II, and Iran's protestors grew up right after Iran's last crisis war, the 1979 Islamic Revolution, followed by the Iran/Iraq war that ended in 1988.

And so, Dear Reader, if you're one of the many people who love Iran's protestors, but who hate America's Boomers, then you may be in conflict with yourself. If you want to know what today's doddering Boomers were like when they were kids, just look at today's Iranian protestors.

(For more information on generational archetypes, see "Basics of Generational Dynamics.")

Let me put it another way: Today's Boomers are anxious, frightened, moralistic, judgmental, arrogant and narcisstic. If you'd like to know what these Boomers were like when they were cute kids, just look at today's Iranian protestors. You'll see that they're fearless, moralistic, judgmental, arrogant and narcissistic. The only thing that growing old does to them is to change them from fearless to frightened.

Thus, it's not surprising that Iran's young protestors are becoming more and more furious and outraged about what they see as a complete betrayal by the government. Like our Boomers, they're arrogant and narcissistic. They'll demand the moral high ground, and they'll never back down unless Iran's security forces perpetrate a massacre -- and even then, the protestors will be back when they think it's safe.

Outrage versus pragmatism

That's only half the story. The other half is about the Supreme Leader, Ayatollah Ali Khamenei, whose harsh Friday speech I described a couple of days ago.

Khamenei was born in 1939, 30 years after the end of the Constitutional Revolution, Iran's previous crisis war. That means that Khamenei is in the Nomad generational archetype, like our Generation-Xers, including President Obama.

So this is a delicious twist. Like today's Xers, Khamenei grew up in the shadow of the previous Prophet generation, the one that grew up right after the end of the Constitutional Revolution. Khamanei probably hated them as much as today's Xers hate the Boomers.

So now Khamenei is dealing with a new Prophet generation, and as the saying goes, he must feel like it's "déjà vu all over again." The young protesters are just like the older generation he grew up with -- just as arrogant and narcissistic -- except that now they're much younger than he is. And he probably has the same visceral hatred for them.

Like Gen-Xers, people in any Nomad generation are considered to be "pragmatic," doing anything that's necessary to get the job done. So we can assume that Khamanei will take whatever "pragmatic" action he believes that he has to take to regain control, and defeat the protestors.

There's an old philosophical paradox: What happens when an irresistible force meets an immovable object?

Since the protestors -- the irresistible force -- are going to continue protesting, and Khamenei -- the immovable object -- is going to use whatever he force he has available to end the protesting, we have a kind of political variation of the old paradox.

I always say on this web site that the attitudes and behaviors of a small group of politicians are irrelevant to the great events of a society or country, except insofar as the politicians' attitudes reflect those of the masses of people. What matters are the attitudes and behaviors of those masses of people, entire generations of people. That's a fundamental concept of Generational Dynamics.

Unless Khamenei and the clerics perpetrate massive slaughter on the protestors, there really is no question about who will win this political battle -- the protestors. I'll discuss this further later in this report.

A Revolutionary Confrontation

One key to understanding the generational confrontation in Iran today is a statement that I heard several times from BBC commentators: "The Islamic government has always been contemptuous of the way the Shah of Iran, [Iran's pre-1979 leader,] buckled 30 years ago in the face of popular protest."

To put this into context, think of Supreme leader Ayatollah Ali Khamenei (Nomad archetype) as being the Barack Obama of the 1979 Islamic revolution. In 1979, Khamenei would have been contemptuous of all the accomplishments of Iran's previous Prophet and Artist generations, just as Obama is contemptuous of the accomplishments of the Boomer and Silent generations. According to the BBC statement, Khamanei was particularly contemptuous of the way that his predecessor, the Shah of Iran, buckled to popular protest.

Khamenei was in the generation of protestors in 1979. Today, he's in the position that the Shah occupied in 1979, and he's in the generation opposing the protestors. Even so, the generational dynamics are very similar. He's not going to buckle to the protestors, Iran's new Prophet generation. He's as contemptuous of this new Prophet generation as he was of the previous Prophet generation, including the Shah.

The revolutionary guards have ordered demonstrators to "end the sabotage and rioting activities" and said their resistance was a "conspiracy" against Iran.

A statement posted on the revolutionary guards' website warned protesters to "be prepared for a resolution and revolutionary confrontation with the guards, Basij and other security forces and disciplinary forces".

This promise of "revolutionary confrontation" may have stopped some protestors in their tracks, but it's infuriating to the Prophet generation, who will never agree to give up the moral high ground.

This is the confrontation between an irresistible force and an immovable object, as I described it above, and if Iran were in a Crisis era (like 1979), this could result in a violent revolution.

Iran's political split

But it's not a Crisis era. Iran is in a generational Awakening era.

In a Crisis era, like Iran in 1979 and in the 1980s, civic unity is regenerated, and political bickering decreases and tapers off.

In an Awakening era, like Iran today, civic unity deteriorates, and political bickering increases.

That's what's happening in Iran, as the split among the ruling clerics is getting increasingly serious. Here's a New York Times report on the political split:

"TEHRAN — A bitter rift among Iran’s ruling clerics deepened Sunday over the disputed presidential election that has convulsed Tehran in the worst violence in 30 years, with the government attempting to link the defiant loser to terrorists and detaining relatives of his powerful backer, a founder of the Islamic republic.

The loser, Mir Hussein Moussavi, the moderate reform candidate who contends that the June 12 election was stolen from him, fired back at his accusers on Sunday night in a posting on his Web site, calling on his own supporters to demonstrate peacefully despite stern warnings from Iran’s top leader, Ayatollah Ali Khamenei, that no protests of the vote would be allowed. “Protesting to lies and fraud is your right,” Mr. Moussavi said in a challenge to Ayatollah Khamenei’s authority.

Earlier, the police detained five relatives of Ali Akbar Hashemi Rafsanjani, a former president who leads two influential councils and openly supported Mr. Moussavi’s election. The relatives, including Mr. Rafsanjani’s daughter, Faezeh Hashemi, were released after several hours.

The developments, coming one day after violent protests in the capital and elsewhere were crushed by police officers and militia members using guns, clubs, tear gas and water cannons, suggested that Ayatollah Khamenei was facing entrenched resistance among some members of the elite. Though rivalries among top clerics have been part of Iranian politics since the 1979 revolution, analysts said that open factional competition amid a major political crisis could hinder Ayatollah Khamenei’s ability to restore order."

This political split is the opening to a solution to the "revolutionary confrontation." The only solution that I can see, short of a huge massacre, is that Khamenei will be forced to back down to the protestors, leaving him to end his life with bitter memories of his failure as a leader. His political opponents, known as "pragmatic conservatives" and led by Rafsanjani, will be the winners.

The role of women in an Awakening era

During a generational Crisis era, women move in the direction of traditional stereotypical female roles and behaviors. See for example my 2004 posting, "'It's going to be the 1950s all over again.'" During Crisis eras, the protection of women becomes an important goal of society, and this continues during the Recovery era that follows the crisis war.

To understand this, think about what mothers were like in the 1950s. There is probably no era so misunderstood as the 1950s, which feminists have painted ridiculously as a time when men were forcing women to stay at home, and refusing to allow them to work outside of the home. Nothing could be further from the truth.

Mothers in the 1950s grew up during the 1930s, where they were surrounded by massive homelessness, starvation and suffering. People were living under bridges, and had to depend on soup kitchens just to get enough food to survive. Then, World War II began. Their brothers, fathers and uncles were tortured and killed on the Bataan Death March, and then were shot down like fish in a barrel on the beaches of Normandy. The women themselves took "Rosie the Riveter" jobs that they hated, but took them out of patriotism, and to support their brothers, fathers and uncles overseas.

It's not an exaggeration to say that these women were traumatized by their experiences. By the time the 1950s came, they considered it a wonderful gift from America that they could stay at home with the kids, living in their homes with white picket fences. This was the American way of life that they had earned in the Great Depression and the war, and they wanted to give that as a gift to their daughters.

The same thing happened to women growing up in Iran's Islamic revolution of 1979 and the Iran/Iraq war of the 1980s. Their fathers, brothers and uncles were maimed and killed by Saddam's forces, and some were gassed to death. It was even worse for these women than it was for American women in WW II, since the Iran/Iraq war took place on Iranian soil, especially because rape is always common during a crisis war. The mothers of daughters growing up after the war ended wanted their daughters to live happy lives enjoying the fruits of the Islamic revolution.

This is what happens to every nation in every Crisis war. But the daughters who grow up after the war ends do not feel the trauma of the war itself. They resent the restrictions placed on them by their parents, who only wish for them to have a happier life, free of the tortures and rape of war.

In Iran's Islamic culture, these restrictions took many forms. Young women would have to wear loose clothing and headscarves, and could not spend time alone with a male. These restrictions actually do make a lot of sense during a crisis war, but not in times of peace.

Neda Agha-Soltan and young women today

While a generational Crisis era is dominated by men, a generational Awakening era is dominated by women (or, at least, women's issues), as the austere rules of the Recovery era begin to unravel.

For years I've been mocking Mahmoud Ahmadinejad's "morality police," who swoop down on women with loose headscarves, and carry them off the police station. Ahmadinejad has managed to piss off practically every young woman in Tehran.

Well, now the young women are getting even.

I wrote last week that Zahra Rahnavard, the wife of opposition candidate Mir-Hossein Mousavi, had taken an active part in the campaign, after Mahmoud Ahmadinejad had insulted her during his debate with Mousavi.

Neda Agha-Soltan - undated picture
Neda Agha-Soltan - undated picture

A number of news stories have been reporting that women have been playing a leading role in the protestors, especially since the violence by the security forces began. There was a lengthy interview on CNN on Monday with a 19 year old girl who has been taking part in all the Tehran protests. She has been beaten by a baton by the security forces, but says that after you've been beaten once, further beatings don't matter. She says that she and a number of other women have been confronting the security forces, asking them, "Why are you killing your sisters, your mothers and your daughters? Why are you killing your own people?" The logic is that the security forces are less likely to kill or beat a woman than a man, so the women are taking the lead.

A pivotal event in the protests occurred on Saturday when Neda Agha-Soltan, a pretty young 26-year-old girl, was shot dead by the security forces, and the entire incident was captured in a video that's been spreading around the internet.

The video of Neda's death can be viewed below.

However, this 40 second video is VERY GRAPHIC. If you watch this video, you may have nightmares, and it may haunt you for a long time. However, if you think you can handle it, then watch it to understand why it's playing such an important role in Iran's chaotic political crisis:

Neda has become an icon for the Iranian protests, and for young Iranian women in particular.

The future of Iran's crisis

From the point of view of Generational Dynamics, Ayatollah Khamanei doesn't stand a chance of getting through this unscathed. If he ever had a chance at all, it ended with the Neda video. He will be forced to back down, and since he's already staked his reputation on not backing down (see "Iran's government panics, as Supreme Leader hints at violence against protesters"), it will be a humiliating end to his career.

The reasoning in reaching this conclusion is as follows:

However, to say that Khamanei will have to back down does not mean the end of the Islamic regime.

The Walter Cronkite effect

During the last week, all the political shots have been called by Khamenei, making it clear that Ahmadinejad is nothing more than a cypher in Iran's government. However, this did not increase the stature of Khamenei. Khamenei is supposed to be a spiritual leader who stays above the fray, but his actions this week have brought him down into the political mud with everyone else. So the stature of the entire Islamic "religious democracy" has been stained.

It's not clear whether Ahmadinejad can survive (politically) in the current crisis. But even if he does, his rantings about holocaust denial and pushing Israel into the sea will no longer have their former panache and charm.

More significant will be Iran's reputation as the biggest state sponsor of terrorism in the world, particularly as it applies to Hizbollah in Lebanon and Hamas in Gaza.

Early in 1968, during the Tet offensive of the Vietnam War, CBS reporter Walter Cronkite went to Vietnam, and came back and reported that the war was unwinnable. This report is thought to be the turning point in public opinion over the Vietnam war. It led immediately to the forced decision by President Lyndon Johnson not to run for another term, and later to increased protests and the resignation of President Richard Nixon.

A major part of Ahmadinejad's legacy is the huge amount of money he's spent funding Hizbollah and Hamas through Syria. This has always been a manifestation of Ahmadinejad's insanity anyway, since Hizbollah is Shia Muslim and Hamas is Sunni Muslim. But more to the point, Iran's economy has been deteriorating since Ahmadinejad took office in 2005, and many people blame his monetary support of these two terrorist groups.

All that would be needed at this time or in the near future is for someone prominent in Iran to make a similar "Walter Cronkite" type statement, referring to the funding of Hizbollah and Hamas.

Thus, this political crisis in Iran may have substantial effects on the balance of power in Syria, Lebanon, Israel and Palestine.

Finally, there may be a resolution of Iran's schizophrenia, as I've described for years as a country where the people, especially young people, are pro-American and pro-West, while the government was virulently anti-American and anti-West. One possible outcome of this crisis (over time) is that Iran will become much more pro-Western and much less anti-American. Iran would still be an Islamic "religious democracy," but its foreign policy would be substantially different.

(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (23-Jun-2009) Permanent Link
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Iran's government panics, as Supreme Leader hints at violence against protesters

Friday's speech by Ayatollah Ali Khamenei was a significant escalation in the war of words, and may be signaling a major confrontation in the streets in the next few days. Tehran's streets have been filled with literally hundreds of thousands of protesters and demonstrators every day this past week, and Khamenei's speech provides the justification for taking very drastic counter-measures.

In his speech, Khamenei focused on themes that related the current crisis to Iran's last generational Crisis war, which began with the Islamic Revolution of 1979 and continued with the Iran/Iraq war. (Recall that President John Kennedy's inauguration speech related back to World War II.)

It's worth remembering that the Iranian people, including government officials, believe first and foremost that Iran's Persian civilization is perhaps the greatest that the world has known. To Khamenei and to many other Iranians, the "religious democracy" that was instituted in 1979 is the best and freeest government in the world today.

Thus, among the major points in Khamenei's speech, he emphasized that the high turnout in the election, with over 40 million voters, showed the people's solidarity with the Islamic government.

Thus, Khamenei's implied threats were particularly ominous. He said that the illegal street protests must stop, since they were aimed at reversing the result of a legitimate election. Thus, the leaders of the protests would be responsible for the consequences (implying violence and bloodshed) if they did not stop.

He returned to a commonly used theme of the Islamic regime by blaming the protests on western governments and media, especially Britain and the BBC.

According to an informal translation from the Farsi, Khamenei continued:

"Remember God, Iran has gone through a lot since the revolution. [Many] have put us in turmoil, even our neighbors.

Our youth are in a materialistic world, in a time of turmoil. They don't know what to do. They need to understand spirituality. They need to get back to spirituality, but they don't know how.

It's been two centuries since the west has been destroying cultures. But our nation wants to regain that spirituality back, so that the revolution can be regained."

I want to mention here that that although Khamenei's speech has received almost universal scorn in the west, these are not the typical sleazy words of a politician (such as would be spoken by Ahmadinejad). These are spiritual words by a man who has devoted his life to Iran and the Islamic revolution, and who is very worried that the country is being threatened -- both from within and from outsiders.

He continued by calling for the support of today's youth, just as the previous generation of youth fought in the Iran/Iraq war:

"This is the largest number of people that have taken part in an election in Iran since the founding of the republic and the passing of the constitution. I would like to deeply thank you. The youngsters in our country showed especially, that they are partaking in the political process since the beginning of the revolution.

Now we'll see the same responsibilities from them that we saw during the Iraqi Aggression War. ... We saw everyone, men women, the young and the old, people participating from all over the country to make this [election] a success.

This election is a political defeat for your enemies, and for your friends all over the world a celebration, a historic one. People are showing love and loyalty for their Imam and martyrs, and for the system.

This election was a religious democratic event. Everyone saw it. It was a showing against the dictators and oppressive regime, and FOR a show of support for the religion and system. ...

Also another point about the election. The election of June 12 showed that people with beliefs and hopes and joys is living in this country."

Khamenei came down very hard on the west.

"The enemies are trying [to harm Iran] through their media - which is controlled by dirty Zionists. The Zionist, American and British radio are all trying to say that there was a competition between those who support and those who didn't support the state.

Everyone supported the state. I know everything about these candidates. I have worked with them. I know all of them."

His point was that all four of the candidates, including the reformist candidate Mir Hossein Mousavi, are all working within the system, and are all supporting the Islamic religious democracy. Those who claim that some candidates are trying bring down the Islamic regime are, well, "dirty Zionists."

He says that the youth "need to get back to spirituality, but they don't know how." In expressing the bafflement of the youth, he's really expressing his own bafflement. In fact, it would not be an exaggeration to say that Iran's government is in a state of panic.

The fear of Khamenei and the hard line mullahs is a reversal of the 1979 Islamic Revolution, which also began with massive street demonstrations. Once again, this isn't just political overstatement by Khamenei, but a deeply held belief by a very religious cleric.

Khamenei promised some unnamed "consequences" if the demonstrations continue, but for outsiders, the question is whether those "consequences" would include a Tiananmen-square type massacre, as happened in China in 1989, when the army turned its tanks and guns on unarmed demonstrators, killing hundreds or thousands of them.

It's worthwhile briefly looking back at the last week, since the June 12 elections. Up until now, Khamenei has been advising restraint on all sides, and has been approving only limited counter-measures, including the following:

It's clear that Khamenei and other government clerics are baffled by what's going on, not understand what a generational Awakening era is, and have been trying anything and everything, hoping to stop it.

(For information about generational eras, see "Basics of Generational Dynamics." For information about America's Awakening era in the 1960s, see "Boomers commemorate the 40th anniversary of the Summer of Love.")

Iran's governmental structure makes Khamenei the most powerful government official, but he doesn't have absolute powerful. His decisions can be overriden by other clerics, and they're not all unified in Khamenei's strategy.

The leader of the internal government faction opposing Khamenei is former President Ali Akbar Hashemi Rafsanjani, who supported Mousavi in the election, and who is now opposing government violence. If "something" happens to Rafsanjani, then that may be the signal that the hardline Khamenei-led faction has won within the government, and will move ahead with the feared Tiananmen-style massacre.

The most familiar historical analogy we can look at is what happened following America's 1967 Summer of Love, and then the violence at the Democratic National Convention in Chicago in 1968. This violence did not quell the demonstrations, or end the "long, hot summers." The Summer of Love launched almost a decade of these protests and demonstrations, culminating in the resignation of President Richard Nixon in 1974.

Following that analogy, we can expect the demonstrations in Tehran to continue this summer, and then continue for several years.

Like the Summer of Love and the Boomer demonstrations in the 1960s, the demonstrations in Tehran have a high erotic component, as young people free themselves from the austere restrictions that followed the last crisis war (the 1979 Islamic Revolution, followed by the Iran/Iraq war).

One thing that's fun to watch is how young women are moving their headscarfs back, exposing more and more of their hair, just like American young women in the 1960s adopted miniskirts and hot pants, exposing more and more of their legs, and freaking out their parents.

One act that will really signal the younger generation's rejection of the clerics' rules will be when young women remove their head scarves entirely. It's not entirely frivolous to mention this, because the removal of headscarves seems to be a minor thing, but it would actually be a major act of defiance, striking at the heart of the Islamic religous regime. This act alone would be considered justification by the mullahs for violent countermeasures.

Ayatollah Ali Khamenei's Friday speech appears to provide sufficient justification for increased violence by the security forces against the protestors, but even now, increased violence is not a certainty. Iran's clerics can read the newspapers as well as we can, and they're well aware of how an overreaction would destroy whatever moral high ground they believe they have. They are also well aware of the continuing worldwide revulsion at the 1989 Tiananmen Square massacre, and they would be loathe to risk bring similar opprobrium to their own Islamic regime.

On the other hand, the protests are going to continue and get worse, as they do in every country's Awakening eras. It would require a great deal of perserverance for the clerics to suffer through the unending protests without overreacting. If the protests get significantly worse, Khamenei may have to give in to the hard liners and strike back. This is still a possibility, but not a certainty.

The next test will apparently come on Saturday, and it may provide a guide to the future. Khamenei has said, "the protests must stop." However, it is believed that there will be more large protests on Saturday. How Iran's security forces act on Saturday may indicate how they're going to continue to act throughout this long, hot summer, and into the future.

(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (20-Jun-2009) Permanent Link
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Wall Street Journal sharply revises its fantasy price/earnings computations

Do you suppose they read this web site?

I've been writing about this for a couple of months now.

In April, I wrote "Wall Street Journal and Birinyi Associates are lying about P/E ratios." I provided screen shots of WSJ P/E ratio page, and showed how WSJ was fudging the numbers by a substantial amount, apparently on purpose.

The P/E ratio numbers that WSJ publishers are obtained from Birinyi associates. In May, I saw a Bloomberg TV interview with Laszlo Birinyi, and I wrote a report, "Laszlo Birinyi provides insight on his fantasy price/earnings computations." It's clear that WSJ was lying about P/E ratios.

What motive could WSJ possibly have for doing this? Because they'll lose their advertisers if they report negative market news. Most advertisers earn commissions by selling stocks to individual investors, and reporting a high P/E ratio would discourage investors and anger advertisers.

I've been told that a number of WSJ readers have complained directly to WSJ on the same matter.

Here are the charts that I displayed in the April report:

Wall Street Journal P/E charts.  Top: 29-Jan-2009.  Bottom: 24-Apr-2009. <font size=-2>(Source: WSJ)</font>
Wall Street Journal P/E charts. Top: 29-Jan-2009. Bottom: 24-Apr-2009. (Source: WSJ)

The top chart, from January 29, 2009, shows an S&P 500 ratio of 15.72. Supposedly, that figure is: "P/E data on as-reported basis from Birinyi Associates." But that figure was already wrong, since the P/E ratio was above 18 all year, and has been well above 15 for ten years. There is no possibility whatsoever that 15.72 is a correct figure.

The second chart above, for April 24, 2009, is even worse. Notice that the claim "P/E data on as-reported basis from Birinyi Associates" has been removed. The figure 13.09 is even lower than the 15.72 figure, and is absurd.

WSJ, CNBC, Bloomberg TV and other mainstream financial media have been abandoning the use of actual "as reported" earnings, because they're afraid of losing advertisers. Instead, they've switched to "operating earnings," which equal earnings, but with one-time losses left out. Since all the writedowns of "toxic assets" are one-time losses, "operating earnings" are based on a make-believe world in which we're still in a real-estate and credit bubble, and the credit crisis never happened. If someone wrote a novel about this, it would be rejected as unbelievable.

However, things have changed in the last month. Here's the latest WSJ P/E chart:

Wall Street Journal P/E charts for 12-June-2009 <font size=-2>(Source: WSJ)</font>
Wall Street Journal P/E charts for 12-June-2009 (Source: WSJ)

Now, this new chart is interesting, and presents its own peculiarities.

Note that the claim of "as reported" earnings has returned. This is a complete about-face.

Next, the S&P 500 P/E ratio has jumped to 36.41 from 13.09 last month.

36.41 is a lot more honest, but I still have no idea where that figure came from.

Here are the "official" S&P 500 P/E ratios, from the Standard & Poors spreadsheet, for each quarter since 2007:

             2007     2008        2009
      --    -----    -----      -------
      Q1    17.09    21.90       136.64
      Q2    17.70    24.92      1981.88*  * = Estimated.
      Q3    19.42    25.38      -449.62*
      Q4    22.19    60.70        32.79*

The 2009 figures are not errors. They're occurring because earnings were actually negative in Q4 2008, and the estimates are very low in 2009. (For example, the P/E ratio for Q3 2009 is computed by adding together the earnings for that quarter and the three previous quarters. The reason that the P/E ratio estimate turns positive in Q4 2009 is because it no longer includes the negative earnings of Q4 2008.)

So where did 36.41 come from? Maybe somebody at WSJ or Birinyi Associates has a sense of humor, and said, "The P/E ratio for Q1 2009 is 136, so let's just drop the '1', and make it 36." Who knows?

I've recently read some commentary from someone claiming that P/E ratios (also called "valuations") are irrelevant to the market because P/E ratios are "backward looking," while the market is "forward looking."

This is so typical of the craziness we see today in the mainstream financial media. Obviously, the best guide to next year's earnings are this year's earnings.

Even more important, reported earnings are the only "real" figures that are available. (So are related figures, such as sales.) Everything else is made up by analysts and corporate spin-masters. Furthermore, we have solid trend data on these figures, so we can make historical judgments.

Last week I heard a commentator (perhaps Art Cashin on CNBC) say something like, "Well, if the S&P reaches 960, then it will cross a resistance level, and can go up to 1000."

I find such statements absolutely astounding. He's saying that 960 is some kind of magic number which may or may not be reached, but if it is reached, then there's an easy ride to 1000.

Well, what if the "real value" of the market is S&P 975? It's an astonishing question that no one in the mainstream media would even know how to answer. It's not a question they even think about. To them, the concept that "valuation" really means something is totally foreign to these people.

That's why these people can never see a bubble, even when they're in the middle of it. It never occurs to them that the price of a stock should reflect the value of the corporation that it represents. It's as if the stock market is nothing more than a Monte Carlo casino game, where stock prices have absolutely no relation to reality.

The one thing that relates stock prices to reality, of course, is reported corporate earnings. These analysts and reporters in the financial media hate dealing with reported earnings, because they're the only thing that they can't fake.

There is, of course, a "real value" to the stock market, as I've been saying for years. (See: "How to compute the 'real value' of the stock market.") The real value is around Dow 5000, or roughly S&P 500. So the market is still very far overpriced today.

From the point of view of Generational Dynamics, we're still headed a major stock market crash, with the market falling far below its current level. The market has been overpriced and in a bubble since 1995, and there is absolutely no chance whatsoever that we're going to escape the consequences of that. As I've said many times, no one has yet repealed the Law of Mean Reversion, and the Law of Mean Reversion says that the market will fall very far, and will stay there for many years.

What's really remarkable is the Wall Street Journal has suddenly done an about-face, and is abandoning the fantasy P/E ratio of 13. It's now publishing a value of 36, a value so high that it will stop some investors in their tracks. What effect, if any, it will have on the stock market as a whole remains to be seen.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (15-Jun-2009) Permanent Link
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Iran: Violent street demonstrations follow Ahmadinejad's landslide election victory

Opposition supporters are claiming massive election fraud, after the Interior Ministry announced an overwhelming victory for President Mahmoud Ahmadinejad, with 62.6% of the vote, against 33.75% for the leading opposition candidate, Mir Hossein Mousavi. The turnout was a record 85 percent of Iran's 46.2 million eligible voters.

Opposition leaders point out that polls had indicated a very close election, and Mousavi had a good chance to win if turnout was high. The turnout was in fact extremely high, with millions of new voters, but the announced election results would seem to indicate that all the new voters voted for Ahmadinejad. This appears very unlikely, in view of the huge election rallies for Mousavi in the last few days.

Whatever the truth is about whether election fraud has occurred, the perception is that it HAS occurred, and this has infuriated supporters of Mousavi and other opposition and reform leaders.

As we explained a few days ago, from the point of view of Generational Dynamics, Iran is almost exactly at the same point on the generational timeline as America was during the 1967 Summer of Love.

The riots and demonstrations in Tehran on Saturday can be compared to the riots and demonstrations at the Democratic National Convention in Chicago in 1968, and are generated by the same kinds of emotions -- enormous frustration among young people at the rules and restrictions imposed by their parents, who are still traumatized by the preceding crisis war.

From the point of view of Generational Dynamics, there is one major, significant difference between America in 1968 and Iran today: America's previous crisis war was an external war (World War II), while Iran's previous crisis war began with a civil war (the Islamic Revolution of 1979). This is a significant difference in the generational theory approach to understanding Awakening eras.

We see it in play today in Iran. This is the height of Iran's generational Awakening era, which means that there is absolutely no possibility whatsoever that the current unrest will spiral into a full scale civil war.

But since the last crisis war began with a civil war, the mullahs who run Iran don't know that. All they know is that today's unrest by youth looks almost EXACTLY the same as the unrest by youth by mullahs in 1979. In fact, it's exactly these mullahs who were the youth that caused the unrest in 1979.

Thus, there's a significant possibility that the mullahs will panic and overreact. If the mullahs become convinced that a governmental overthrow is possible, then they could overreact and use the army to end the demonstration through massive slaughter, as happened in Tiananmen Square in 1989.

I heard one Iranian commentator on the BBC respond to the question "Will the demonstrations continue?"

He said, "It depends on how the government responds, whether they're firm and fair."

This is completely wrong. These demonstrations will continue to grow irrespective of how the government responds. That's what happened in America after the Summer of Love, and that's what happens in every country during a generational Awakening era at any time in history.

However, things can go badly wrong, and generational theory tells us that this is what might happen when the previous crisis war is a civil war.

There's one exception to this: If the government overreacts, fearing a new civil war, and responds with extreme violence, killing thousands of demonstrators, then the demonstrations will end, and the government will have laid the groundwork for a future civil war.

Even if the demonstrations are permitted to continue with little violence, as happened in America in the years following the Summer of Love, there will still reach a point where the government will be forced to change, just as Presidents Lyndon Johnson and Richard Nixon were driven from office. In fact, some Iranian government officials have already expressed concern about a "velvet revolution," and indicated ominously that such activities will not be tolerated.

The Summer of Love began a decade of bitter generational political conflict in the US, conflict that included riots, demonstrations, assasinations, and occasional bombings by the terrorist group Weather Underground.

Iran is about to enter a similar period, and it's hard to believe that the mullahs in power will tolerate the kind of political conflict that occurred during America's Awakening era. Thus, a big military crackdown is a real possibility in the next few days, weeks and months in Iran.

Update. I've learned on the Sunday news shows something that I hadn't fully realized -- that Washington considers the Iran election to be a referendum on President Obama's recent speech in Cairo. Thus, if Mousavi had won, it would have been a major foreign policy victory for Obama, but now it's a defeat. This is total insanity. I doubt that even a single Iranian voter changed his mind in either direction because of Obama's speech. The fact that people in Washington believe otherwise is a sign of how completely out of touch the Washington politicians are. (Paragraph added - 14-June)

(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (14-Jun-2009) Permanent Link
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WHO declares a worldwide H1N1 "mild" swine flu pandemic

The big question is: What's going to happen in the fall?

Saying that "We are in the earliest days of the pandemic," Dr Margaret Chan, Director-General of the World Health Organization, announced that "the level of influenza pandemic alert [has been raised] from phase 5 to phase 6. Here are some excerpts from her statement:

"World now at the start of 2009 influenza pandemic

In late April, WHO announced the emergence of a novel influenza A virus.

This particular H1N1 strain has not circulated previously in humans. The virus is entirely new.

The virus is contagious, spreading easily from one person to another, and from one country to another. As of today, nearly 30,000 confirmed cases have been reported in 74 countries.

This is only part of the picture. With few exceptions, countries with large numbers of cases are those with good surveillance and testing procedures in place.

Spread in several countries can no longer be traced to clearly-defined chains of human-to-human transmission. Further spread is considered inevitable.

I have conferred with leading influenza experts, virologists, and public health officials. In line with procedures set out in the International Health Regulations, I have sought guidance and advice from an Emergency Committee established for this purpose.

On the basis of available evidence, and these expert assessments of the evidence, the scientific criteria for an influenza pandemic have been met.

I have therefore decided to raise the level of influenza pandemic alert from phase 5 to phase 6.

The world is now at the start of the 2009 influenza pandemic.

We are in the earliest days of the pandemic. The virus is spreading under a close and careful watch."

Chan pointed out that so far the virus has been mild, relative to other flu viruses, but that the most severe infections have been in young people.

Concerns for the fall

As we discussed last month in "Rapid worldwide H1N1 swine flu spread is raising big concerns for the Fall," young people are particularly vulnerable because they have the strongest immune systems, and H1N1 deaths are most often caused by an overreaction of the immune system.

Timeline: Three waves of 1918 Spanish flu pandemic <font face=Arial size=-2>(Source: CDC)</font>
Timeline: Three waves of 1918 Spanish flu pandemic (Source: CDC)

There's a great deal of concern that we may be facing a repeat of the 1918-1919 Spanish Flu pandemic that killed tens of millions of people.

The graph on the right shows the three waves of the 1918 pandemic, and so far we seem to be following the same path, and this time it would kill hundreds of millions of people.

Chan indicated the same thing when she said, "We are in the earliest days of the pandemic." Here are some more excerpts:

"Although the pandemic appears to have moderate severity in comparatively well-off countries, it is prudent to anticipate a bleaker picture as the virus spreads to areas with limited resources, poor health care, and a high prevalence of underlying medical problems. ...

A characteristic feature of pandemics is their rapid spread to all parts of the world. In the previous century, this spread has typically taken around 6 to 9 months, even during times when most international travel was by ship or rail.

Countries should prepare to see cases, or the further spread of cases, in the near future. Countries where outbreaks appear to have peaked should prepare for a second wave of infection."

As I wrote last month, it's difficult of impossible to quantify this. The best I can come up with is this: There appears to be a non-trivial probability that an extremely virulent swine flu pandemic will occur in the fall. But whether "non-trivial probability" is 1%, 5%, 10% or 15%, I really don't know.

We may get some further indication in the next couple of months from Australia and the Southern Hemisphere, where it's winter, and the height of the flu season.


One thing that this web site is all about is preparation. Even if the flu virus remains mild, we can almost certainly expect to see more schools, restaurants and other businesses closed on a temporary basis, and public events canceled.

What will you do when that happens? What will you do if the stores in your neighborhood or town are closed? What will you do if the kids have to stay home from school? What will you do if you and your family are quarantined in your home?

These are things you can prepare for today -- while you're well, while stores and schools are still open. You can stock up on canned food. You can buy a couple of board games to pass the time. You can be prepared with medicines. Something as simple as a couple of boxes of tissues can make a difference. You might also want to think of ways to "put your affairs in order." Regardless of the flu or anything else, everyone should have an up to date will at all times.

You don't have to spend a lot of money, so that if this whole flu scare fizzles, then you haven't lost anything. But this is the time to keep your head and prepare, making some specific plans for how you and your family will survive if the worst happens.

(Comments: For reader comments, questions and discussion, see the Swine Flu Pandemic - Preparation thread of the Generational Dynamics forum.) (13-Jun-2009) Permanent Link
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World Bank forecast for global economy turns sharply worse

The world economy will contract by 3% this year, far more than the 1.7% drop predicted just a couple of months ago.

According to the World Bank press release:

"According to the latest Bank estimates, the global economy will decline this year by close to 3 percent, a significant revision from a previous estimate of 1.7 percent. Most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.

“Although growth is expected to revive during the course of 2010, the pace of the recovery is uncertain and the poor in many developing countries will continue to be buffeted by the aftershocks,” Zoellick said ahead of the Group of Eight finance ministers meeting in Italy. “Waves of economic pain continue to hurt the developing world’s poor, who have less cushion to protect themselves. There is much more we need to do in the coming months to mobilize resources to ensure that the poor do not pay for a crisis that is not of their making.”"

The World Bank forecast is in sharp contrast to the Polyannish discussions of "green shoots" that we keep hearing about from people who wish to increase their political popularity, or who wish to continue to make fat fees and commissions from investors.

I keep being astonished at the sheer inanities that I hear from the financial media.

On Thursday morning, the Labor Department announced that 601,000 Americans filed for unemployment claims last week. This is a disastrous figure, but CNBC and other mainstream financial commentators were oohing and ahhing because it had been 625,000 the previous week, and the reduction was considered good news. Meanwhile, the number of continuing claims has been rising continually for months, and it reached a record 6.82 million last week.

You can read the Calculated Risk blog almost every day and read a great deal of bad news. That's not cherry-picking. The long-term trend that I've been talking about for years has not changed, and is still in full force.

The credit and real estate bubbles, which created hundreds of trillions of dollars in money liquidity, has been leaking steadily since August, 2007. Since then, we've been in a massive deflationary spiral. The amount of money in the world has been decreasing by a few trillion dollars every month. That contraction in liquidity means that fewer people can pay debts, can make investments, can meet payrolls.

For example, a new Federal Reserve report says that the net worth of US households fell by $1.3 trillion in the first three months of this year, after falling by $4.9 trillion in the previous three months. These losses make even the bailouts and stimulus programs seem puny by comparison. How much good will a $1 trillion stimulus program do when US households are losing that much net worth every month or two?

And that represents only a fraction of the liquidity losses in the U.S., and a tiny fraction of the liquidity losses around the world.

In a recent column by Ambrose Evans-Pritchard, who is pretty much the only mainstream media journalist who is talking about what's really going on, he wrote:

"Those of us who still question whether the world has purged its toxins are reduced to the same tiny band of moaning Druids from early 2007, when we shook our heads in disbelief as the carry trade swept Iceland to fresh madness and bankers laughed off sub-prime rot at Bear Stearns.

We learned then to thicken our skins with walnut juice, lie down in dark rooms, and dissent from Goldman Sachs. Such seclusion is called for once again as Goldman replays its BRIC anthem and raises its oil forecast to $85 a barrel this year, betting that the world will roar back on a tidal wave of liquidity.

It is perhaps unkind to mention that Goldman issued a $200 call at the top of the speculative frenzy last year, just before oil crashed, but they have broad shoulders."

His point, of course, is that Goldman Sachs, like other politicians and financial firms, stand to benefit financially and politically by making fairy tale claims that the economy has bottomed, and that there'll be a new spurt of growth -- a reflating of the credit bubble -- in the last half of this year. His point is also that these people have been consistently wrong since August, 2007.

He compares today's economy to that of 1931-32:

"The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.

The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us."

He quotes a number of figures in the article to make another point, which I'd like to explain in a slightly different way.

You may recall what happened last fall -- China's economy came close to collapse after the Beijing Olympics ended, leading to a collapse in world wide trade and transportation. As I described it at the time, it was like the science fiction movie, "The Day the Earth Stood Still," except that it wasn't science fiction.

Since then, there have been massive stimulus packages implemented in China, and in other countries including the U.S., and these have given boosts to trade and transportation, pushing up oil, copper and other commodity prices.

This cannot possibly last for long, and Ambrose Evans-Pritchard makes the point that the stimulus packages seem to have run out of steam in the last couple of weeks:

"Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.

US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc.

The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".

Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low."

Right now, these are just short-term figures that have to be confirmed. But they're consistent with the long-term trend of falling money liquidity. The point is that the stimulus and bailout packages may already have run out of steam, as they must sooner or later, and the sharp deflationary spiral will resume with full force.

Meanwhile, the laugh-a-minute Nobel Prize winning economist Paul Krugman, who was chosen by the Nobel Prize committee because he shared their hatred of President Bush, said the following a couple of days ago:

"I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer. Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing."

Gee, summer's only 11 days away. I guess we'll find out pretty soon whether he's right or wrong.

I like to save these quotes by people of Krugman's ilk, so I can quote them later.

The steadily worsening World Bank forecast, which shows the world economy plummeting twice as fast as they expected just a few weeks ago, is a more realistic appraisal of what's really going on.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (12-Jun-2009) Permanent Link
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Angry Ahmadinejad accuses opponents of "Hitler's methods" in raucus presidential election

Under-30 voters may propel Mir-Hossein Mousavi to victory.

From the point of view of Generational Dynamics, Iran is almost exactly at the same point on the generational timeline as America was during the 1967 Summer of Love.

So it's not surprising that Iran's presidential election campaign, with voting to take place on Friday, resembles the same kind of generational split that occurred in America in 1968, when college students and other young protesters drove President Lyndon Johnson from office.

The campaigning became electrifying last week, thanks to a raucous televised debate on Wednesday between the two principal candidates, hard-liner incumbent Mahmoud Ahmadinejad and reformist candidate Mir-Hossein Mousavi.

The two candidates refused to look at one another during the debate, and made personal attacks on each other.

Mir-Hossein Mousavi and Mahmoud Ahmadinejad
Mir-Hossein Mousavi and Mahmoud Ahmadinejad

The debate was so vicious that the Supreme Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei issued a statement saying that presidential debates should remain within religious framework.

The consensus seems to be that Mousavi won the debate, mainly because of Ahmadinejad's behavior. He was extremely sarcastic and sneering, and his facial expressions were contemptous and condescending when Mousavi was speaking. Furthermore, he attacked Mousavi's wife, accusing her of corruption, and that attack appears to have turned people away from Ahmadinejad.

As I've described many times, Iran is a schizophrenic nation. Ahmadinejad represents the older generation of survivors of the last crisis war, the Great Islamic Revolution of 1979 and the subsequent Iran/Iraq war. He's been very hardline Islamist and anti-American, arresting women for wearing their head scarfs back and going around the world talking about wiping Israel off the map and denying the Holocaust.

People in younger Prophet generation (like our Boomers) are quite different -- generally pro-American and pro-Western, and not particularly anti-Israeli, although they don't like American forces in Iraq.

Mousavi is also a survivor of the 1979 revolution, but he's adopted the views of the young Prophet generation, and is very popular with them.

Thus, there's actually a possibility that Mousavi will win the election this week, much to everyone's surprise.

This is far from certain though, because the Ahmadinejad administration is very corrupt, and Ahmadinejad has been buying votes.

An acrimonious campaign

Those opposed to Ahmadinejad frequently claim that he has harmed Iran internationally with his vicious anti-Americanism, his open threats against Israel, and his confrontational policies about nuclear power.

At the debate last week, Mousavi attacked Ahmadinejad's foreign policy:

"The truth is that I sensed that the future of this country was in danger, given the current administration. Since the debate began with foreign policy, let me go straight to the issue of foreign policy. ...

Our head of state made a trip to America... Sorry, to Iraq. Without any evidence of where and when, he said that there had been an attempt to kidnap him. This [behavior] makes us pay a price. It was the Americans who supposedly tried to kidnap you - the same Americans who supplied the fuel for our governmental plane in Iraq. Are we supposed to expand our imagination in foreign policy to things that pertain to our national interests? Does this resolve our problems, or does it create new ones, making us pay a steep price? ...

We have been told many times: 'We believe America is being defeated and is on its way to demise.' If that is the case, why did you travel there four times and write them two letters? ...

With regard to the Holocaust - we raised this issue, and again, we were harmed by this. The U.N. General Assembly passed a resolution which made it a crime to talk about the Holocaust, and we were also [condemned] by the Security Council. What happened recently in Switzerland - if I hadn't seen it on TV - I wouldn't have believed how much our president could be affronted. Our president represents our people and our country. He should not be pleased about what happened."

Mousavi himself is a former President, having served from 1980-88, after the Islamic Revolution and during the Iran/Iraq war. After defending his foreign policy, Ahmadinejad attacked Mousavi and also attacked his wife:

"I took a stand with regard to the issue of the Holocaust. Both the leader and the people approved this stand. ...

"Mr. Mousavi, many executives during your term and that of Mr. Hashemi came empty-handed and became billionaires with their import and export franchises." ...

Mr. Mousavi, I like you, but what kind of fundraising is this? Where is this coming from? Let me give you just one example: Rasht Electric. It was given without any tender to friends of [former mayor of Tehran] Mr. Karbaschi, to his wife, and to the wife of Mr. Ghobbeh. They tore down the factory in order to sell the land. There are dozens of similar cases. ...

Lawlessness is prevalent among the sons of some of the people who support you today. How did the son of Mr. Nategh [Nouri] become a billionaire? What kind of lifestyle does Mr. Nategh himself lead? These are your supporters. ...

Zahra Rahnavard, wife of Mousavi <font face=Arial size=-2>(Source: Independent)</font>
Zahra Rahnavard, wife of Mousavi (Source: Independent)

I have a file on a certain woman [[referring to Mousavi's wife]]. You know her. She sits next to you in your campaign broadcasts. In violation of all the country's laws, she studied toward two M.A. degrees when she was a [government] employee. One of them was at Azad University. She received her Ph.D. without having sat any entrance exams. Then she became an assistant professor in an unrelated field. She became president of a university without meeting the necessary requirements. This is lawlessness."

Following this debate, Mousavi's wife campaigned with him, acerbically attacking Ahmadinejad and demanding rights for women.

This kind of acrimony, while typical of any country's Awakening era, is new to Iran since the Islamic revolution. The acrimony has only grown in the last few days, as the campaign has continued to heat up, with charges and counter-charges.

In a speech in Tehran Wednesday, Ahmadinejad said his rivals had broken laws against insulting the president and they could face jail: "Such insults and accusations against the government are a return to Hitler's methods, to repeat lies and accusations until everyone believes those lies."

Anti-Ahmadinejad student demonstrations have been growing in Tehran, with demonstrators carrying green flags, the color of hope in Iran.

However, Ahmadinejad's supporters see a much more sinister intent: "Using a specific color for the first time by a candidate in this election shows the start of a velvet revolution project."

This is a very interesting phrase, and it refers to the 1989 Velvet Revolution which saw the peaceful overthrow of the Communist regime. In other words, Mousavi's supporters are being accused of wishing to overthrow the Islamic revolutionary government.

From the point of view of Generational Dynamics, this could actually happen. A "velvet revolution" is the kind of thing that represents an Awakening era climax, where the young Prophet generation achieves a political victory over the older generation that survived the crisis war. The forced resignation of President Nixon in 1974 is an example of an Awakening era climax in America.

Women's and the morality police

Just as "women's lib" was important in America's 1960s, women's issues are playing a big role in Iran's election today, especially after Ahmadinejad attacked Mousavi's wife last week.

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

For years I've been mocking Ahmadinejad's "morality police," who swoop down on women with loose headscarves, and carry them off the police station. Ahmadinejad has managed to piss off practically every young woman in Tehran.

However, according to a BBC report on Wednesday, Ahmadinejad has called off the morality police as election day approaches. The result is that young women are wearing much more explicit clothing, exposing their figures and hair.

In America's 1960s, young women shocked their parents by outdoing one another wearing short skirts and hot pants. A similar thing is happening today in Tehran, where young women are outdoing one another covering up less and less of their hair, and exposing their ankles. This always remindes me of the lyrics from the song "At the Big Check Apron Ball" from the Broadway show "New Girl In Town":

    Oh, in these modern days
    When ladies show their ankles
    What's there to keep a poor lad, poor lad,
    From going sim-puh-ly mad?

The election aftermath

Whoever wins Friday's voting will not necessarily become President. There are four candidates in the race, and if none of them gets a majority vote, then there'll be a runoff election between the two leading candidates, probably Ahmadinejad and Mousavi.

But as we know from America's 1960s, this generational battle is not going to die off after the election. The acrimony will continue no matter who wins. If Mousavi wins, then he may well suffer the same kind of hostile political climate that President Richard Nixon faced after winning the 1968 election.

Those who are familiar with the "long hot summers," the massive street demonstrations and the student revolts that occurred in America in the 1960s and early 1970s know that we can expect a great deal of similar political tumult in Iran, no matter who wins the election.

(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (11-Jun-2009) Permanent Link
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BlogWatch: Yves Smith at "Naked Capitalism" adopts generational model of financial crisis

She says that middle-level (Gen-X) managers extorted executive (Boomer) management.

I've been relentlessly critical, on this web site, of economists, analysts, journalists, politicians and bloggers who cannot seem to grasp even the simplest, most obvious generational interpretation of what's going on.

I'm still baffled how economists can be so totally dense about the cause of the dot-com bubble of the late 1990s, almost as if they have a brain defect. The dot-com bubble began at precisely the time that the risk-averse survivors of the Great Depression all disappeared (retired or died), all at once, leaving incompetent Boomers in charge as senior managers of financial firms. (See "System Dynamics and the Failure of Macroeconomics Theory" and "Markets fall as investors are increasingly unsettled by bad economic news" for detailed discussions.)

After the dot-com bubble collapsed in the early 2000s, the Generation-Xers began entering middle-management, and the massive credit bubble was launched by means of the creation of fraudulent "toxic assets" that were sold by the trillions of dollars worth to innocent investors. This was possible, as I've written many times, because of the lethal combination of greedy, nihilistic Gen-Xers, combined with greedy, incompetent Boomer bosses. (See yesterday's article, "SEC charges former Countrywide CEO Angelo Mozilo with fraud," for a discussion and illustration.)

Mainstream journalists, economists, analysts, politicians and bloggers are all totally oblivious to such generational explanations, no matter how utterly obvious they are.

So we're pleased to be able to report on a small victory.

Yves Smith, of the highly popular Naked Capitalism blog, has written an article that closely adopts the generational model that I described above.

Smith does not refer to the Gen-X and Boomer generations, but it's clear that she's referring to the generational split when she says that "middle level (meaning MD but not executive level) employees were effectively able to extort management." I've written about the power that Gen-Xers have been able to exert over Boomers (and, particularly, that Gen-X women have found Boomer men particularly easy to manipulate), but Smith adds to this model by referring to it as "extortion."

Here's what Smith wrote:

"What I believe happened is this (very crude story line, but I am highly confident, to use that old Drexel chestnut, that his pans out):

  1. Wall Street firms got big, both as banks started invading their turf (and banks big to begin with). This meant greater spans of control. In the old days, anyone who was running a meaningful profit center was a partner, and there were few enough partners that the management committees could keep on top of them. But as firms got bigger, you had important profit sources that did not have an expert at a higher level running them. They might have some general knowledge of a business, but not specific knowledge.
  2. Trading became more important as a profit center relative to other activities due to (gradual) erosion of profits in other areas thanks to deregulation.
  3. Rising popularity of hedge funds gave top traders (proprietary traders) a ready exit, plus set a new high pay bar
  4. Other boats in trading land rose pay-wise due to 3. Other big producers could always exit to another firm, if not set up own firm.
  5. Even if non-prop traders who are "producers" in theory can be replaced, in practice having top guy disappear, taking key people with him, is a bad position to be in. You do lose momentum, you even risk control failures on the desk. If the book is big and active, they do have management hostage. Particularly in new, specialized areas, it would take time to poach someone from another house to fill the gap. (A big issue here is I am not sure how to define who might be able to hold the firm hostage. The head of any major trading desk might fit the bill; not sure who else ought to be included).

As a result of 1-5, middle level (meaning MD but not executive level) employees were effectively able to extort management. Think of what would happen in a nuclear reactor if the staff who knew how to run it could go on strike. So collectively they were able to get themselves overpaid, often in the form of getting to run bigger risks than they should have (ie, the payout norms may on the surface not have change, in terms of ratio of pay relative to apparent production/profitability, but if you are running much bigger risks, you've increased your personal top line to the detriment of the enterprise).

And the top level guys had reason not to question it because:

  1. Fighting it would risk having the firm appear less profitable, talent would exit
  2. Firms were now public, incentives and pay badly skewed towards short term incentives.
  3. Competition in many markets based on league tables, meaning market share

I have spoken to some experts who believe this fact pattern to be true, but as of 2-3 years ago could not prove it.

I believe that this probably cannot be established in a rock-solid fashion without having access to internal data (and policies), but I wonder whether readers can point to any anecdotes or case examples (in the public domain, say in Institutional Investor, The Deal, other industry publications) supporting the logic chain above."

It's worth repeating a couple of paragraphs from my recent article on the SEC charges against Countrywide's Angelo Mozilo:

Mozilo's crime, according to the allegations, is that, having discovered the fraudulent activities were going on, he attempted to conceal these activities, and he didn't direct his employees to stop them; and that, having discovered the activities, he engaged in insider trading to benefit from them.

If we now apply Smith's "logic chain" to the SEC's indictment, then we can suggest that Mozilo didn't simply neglect to stop his employees from defrauding investors. The implication is that he couldn't stop the fraud because he was being extorted by his employees. What I call a "culture of complicity" can now be called a "culture of extortion."

There's a certain amusing historical irony to all this.

As I've written before, I've often heard the following from Gen-Xers: "We were working for Boomers, and we did what they told us to do, because we had to, or we would have been fired." This is a modern version of the Nuremberg defense.

I usually answer, "If your Boomer boss asked you to kill his wife, would you do that too?"

But now, with Smith's insight, we have a kind of "reverse Nuremberg defense": the executive management of these financial firms can start to claim that they went along with the the massive fraud by their employees because of extortion.

To which I might ask, "If your employees were committing murder, would you go along with that too?"

Any employee whose job involves committing crimes always has the choice of leaving his job. A person making a six and seven digit salary by defrauding thousands of investors can certainly find a job making a five digit salary doing an honest day's work.

Instead, what we have had are huge numbers of nihilistic Gen-X financial engineers and middle managers, combined with incompetent Boomer executive managers, people with no moral and ethical bearings at all, who knowingly defrauded investors for their own financial gain, and destroyed the global financial system along the way.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (7-Jun-2009) Permanent Link
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SEC charges former Countrywide CEO Angelo Mozilo with fraud.

It's a perfect example of how Generation-Xers worked with Boomers to destroy the global financial system.

In August, 2007, just as the worldwide credit crisis was beginning, investors mobbed Countrywide Bank to withdraw their deposits. That was the beginning of the end for Countrywide Financial, the parent company. Countrywide had a huge portfolio of mortgages that have since turned out to be "toxic assets."

Did the people at Countrywide see this coming? Or were they as surprised as so many other people claim to be? According to fraud charges filed by the Securities and Exchange Commission (SEC) on Thursday, former CEO Angelo Mozilo had known for over a year.

Angelo Mozilo, born 1938 (in the Silent Generation), has been called by CNBC one of the "worst CEOs of all time."

Here are some excerpts from the SEC charges:

"Moments ago, the SEC charged the former CEO of Countrywide Financial - Angelo Mozilo - and two other former executives David Sambol and Eric Sieracki with securities fraud. We allege that they deliberately misled investors, and concealed from investors, disturbing trends in Countrywide business practices, including the deteriorating standards in their underwriting process, their increased risk of defaults and delinquencies, and their increasingly dark prospects for the future.

In addition, we are charging Mr. Mozilo with insider trading. According to our complaint, Mozilo raked in nearly $140 million while fully aware that Countrywide's business model was deteriorating and faced a bleak future.

This is a tale of two companies. There was the one that investors saw from the outside, allegedly characterized by prudent business practices and tightly-controlled risk. But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting, and an increasingly suspect business model. ...

While Countrywide told the world that they were "prudently underwritten," the fact is that Mozilo himself wrote in an email that Countrywide was "flying blind" when it came to how these mortgages would perform in the future.

Mozilo believed that the risk was so high that he urged Countrywide to sell its entire portfolio of PayOption ARM loans.

Mozilo also spoke at a May 6 Sanford Bernstein Conference. Mozilo said that PayOption ARM was a "sound investment" and the performance profile of the product was "well understood."

The day after the conference, Mozilo told Sambol in an e-mail that he knew that PayOption ARMs were written on a reduced documentation basis; evidence that borrowers were lying on the applications; that borrowers would reach the 115 percent cap sooner than expected; that will suffer shock that will be difficult if not impossible for many to handle, and "we can't predict what's going to happen in the next couple of years." Those concerns and trends were not disclosed to investors.

What these three men also concealed from investors was their view on the so-called 80-20 loans offered by Countrywide.

This is where one borrower gets two loans to finance 100% of the purchase price of a home.

Mozilo described this product as "toxic" "poison," and "the most dangerous product in existence."

But this view was concealed from investors, who were told that Countrywide "consistently produced quality mortgages."

All in all, the defendants knew, and acknowledged internally, what was happening at Countrywide. They understood that defaults and delinquencies would rise as a result of their aggressive tactics. ...

Meanwhile, while hiding their hand from investors, Mozilo was actively taking his own chips off the table.

We allege that Mr. Mozilo engaged in insider trading by establishing four stock sales plans while he was aware of the company's increasing credit risk and the expected poor performance of Countrywide-originated loans.

Then, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million."

This is a PERFECT illustration of many of the things I've been saying for years on this web site. Note the following:

Mozilo's crime, according to the allegations, is that, having discovered the fraudulent activities were going on, he attempted to conceal these activities, and he didn't direct his employees to stop them; and that, having discovered the activities, he engaged in insider trading to benefit from them.

OK, so then who created the fraudulent securities and wrote the "toxic" loans? There's only one possible answer -- Generation-Xers did. In most cases, Boomers were too incompetent to do it. (See "Stories of massive generational fraud and corruption continue to pour out" for a further discussion of this point.) Mozilo, born in 1938, was from the Silent generation, but in this case the effect is the same.

I keep talking on this web site about the lethal combination of greedy, nihilistic Generation-Xers and incompetent, greed Boomers. This story is a perfect example.

How did Boomers get the way they are? Recall their history.

Boomers grew up in the heady times following the end of World War II. Their mothers had survived the massive starvation and homelessness of the Great Depression, and then watched their brothers, uncles and dads get tortured on the Bataan Death March and get slaughtered on the beaches of Normandy.

So these mothers showered their newborn babies with love, affection, tons of attention, listened to their every problem, and gave them anything they wanted. By the 1960s, Boomers were accustomed to getting anything they wanted simply by asking for it -- or demanding it.

Thus, Boomers never learned to accomplish anything, and didn't learn how to govern or lead or make decisions. All they learned is how to argue with their elders, and make demands -- demands that were almost always granted. But it's their elders who accomplished everything, and made sure that everyone was taken care of.

All that love, affection and attention had worn off by the 1960s, when the Generation-Xers were born. Gen-Xers NEVER got their way, because they always had to defer to the Boomers. They were always painfully aware that they had none of the advantages that their older brothers, sisters and cousins had enjoyed. It is no exaggeration to say that Gen-Xers learned to hate Boomers.

By the 2000s, the older GI and Silent generations were mostly gone, and this left the Boomers in an aimless state. They no longer had the Silents to take care of everything, and so they looked around for someone to take the place of the Silent generation in leading and governing, and that choice fell to the Generation-Xers.

The Gen-Xers have never felt anything but contempt and hatred for the Boomers. Xers realized how much power they now had over the Boomers; Gen-X women found it particularly easy to manipulate Boomer men.

Gen-X contempt was expressed by becoming "pragmatic" -- discarding Boomer and Silent values, and doing "what works". In the financial community, this meant making a lot of money defrauding investors.

You can see how the financial crisis required BOTH the Xers and Boomers -- the Xers to perpetrate the fraud, and the Boomer bosses to go along with it, so they'd make money too. This is how the "culture of complicity" works.

If the Xers were ethical, they wouldn't have perpetrated the fraud; if the Boomers were ethical, they would have stopped the fraud from taking place. If either generation were as ethical as the Silent and GI generations had been, then the financial crisis would have been stopped.

There's another reason why the Mozilo case illustrates how the global financial crisis occurred.

As I wrote a year ago in "Brilliant Nobel Prize winners in Economics blame credit bubble on 'the news,'" experts who were complicit in originally creating the toxic assets, like Nobel Prize winner Joseph Stiglitz, are lying and making excuses, like blaming it on the news or on the Iraq war.

The universal excuse is that when these toxic assets (as they're now called) were designed in the early 2000s, no one knew that they would fail. But even if that were true in the beginning, that excuse falls apart later.

Maybe that excuse works for toxic assets sold in 2003, 2004, 2005, or even 2006. But by 2007, it was perfectly clear that the housing bubble had burst, and that interest rates were rising. So by 2007, companies like Countrywide should have stopped writing bad loans, the financial engineers should have stopped creating new toxic securities, the bank marketing departments should have stopped selling them, the ratings agencies should have stopped giving them AAA ratings, and the monoline insurance agencies should have stopped insuring them.

But that didn't happen. By 2007, the volume of toxic assets actually increased substantially, and they were designed, sold, rated and insured as before. What happened was that everyone wanted to get their fat fees and commissions before the game was up.

So as I've written in the past, this is overwhelming circumstantial evidence that massive fraud was committed in 2007, by people who knew exactly what was going on. There is no question in my mind that it could be proven that hugely illegal activities were going on, and that they could be proven in court by prosecutors who could subpoena the relevant paperwork.

The Mozilo case supports this reasoning. According to the accusations, Mozilo knew, by the end of 2006, that his employees were engaging in fraudulent activities, and his employees must have known as well. And yet, the fraudulent activities didn't stop.

The Mozilo case stands as a perfect illustration of what's gone on in the last few years, and how the Boomers and Xers have worked together, hand in hand, to destroy the global financial system, with the worst yet to come.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (7-Jun-2009) Permanent Link
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Some reader questions on the bear market rally.

People want to know whether the market has finally bottomed.

Here's a question from a web site reader:

"The Baltic Dry Index, a historically excellent way of evaluating international trade and thus world economic activity and direction, has just begun to spike upward. do you think that this is an accurate indicator of the bottom of our economic woes?"

I last wrote about the Baltic Dry Index (BDI) six months ago, in December, in "World wide transportation and trade sink farther into deep freeze."

The Baltic Dry Index is a measure of shipping costs for cargoes in "capesize" vessels -- vessels that are too large to fit through the Suez or Panama canals, and so must go around the Cape of Good Hope or Cape Horn. These vessels transport the huge cargoes of copper, iron ore and other commodities.

Baltic Dry Index and price of copper for 2004 to 4-Jun-2009 <font size=-2>(Source:</font>
Baltic Dry Index and price of copper for 2004 to 4-Jun-2009 (Source:

What happened last fall was that worldwide trade and transportation came to an almost complete halt. It was as if the earth had become frozen in place. The BDI fell an astounding 95% from its peak, and many commodity prices saw similar collapses.

Since January, the BDI has recovered to the point where it is currently 65% below its peak, and commodity prices have also increased.

These increases are apparently caused by China's huge bailout and fiscal stimulus programs, giving factories money to buy copper, iron ore, and other commodities (including gold). This has pushed up the BDI and commodity prices.

However, attempting to reflate its economic bubble cannot work, for China or for the US. If China's factories turn out new products for which there are no buyers, then the products will simply pile up in warehouses. That can't continue long.

When will the market reach a bottom? It's impossible to predict. The best we can do is make a comparison with the 1930s.

The optimistic scenario is that we'll follow the path from 1929-32. The market will fall to around Dow 1500 (around S&P 150) in 2011-12, and then will start rising again.

The pessimistic scenario is that, since the 2000s bubble was orders of magnitude larger than the 1920s bubble, that the market crash will continue past 2012, and go even lower.

There are now huge bailout and fiscal stimulus programs of one kind or another in countries around the world. These programs are creating huge additional distortions in the world financial system, beyond what was done already by the credit bubble and crash so far. Politicians, analysts, journalists and pundits are almost universally proclaiming that the worst is over, and that the world economies will start growing again by the end of the year -- in other words, that the enormous credit bubble will be reflated again.

That is simply impossible. There is no possibility whatsoever that this can work for long. I've been writing about this for seven years, and nothing has changed. The stock market is still overpriced by a factor of over 150% (See "How to compute the 'real value' of the stock market" and the Dow Jones historical page.)

The Law of Mean Reversion has not been repealed. From the point of view of Generational Dynamics, we're current in the midst of a generational stock market crash, the first since 1929-32. The stock market still has far to fall.

"What happened? Why are you not posting your negative thinking about the stock market anymore? Are you too scared to look foolish now? Damn it, why did I believe in your stupid thoughts. I missed this big rally because of you. Stop writing bullshit if you can't understand what's happening out there.

I don't write about this every day because I don't have anything new to say. Nothing has changed.

Here are three recent articles that I wrote on what's going on today:

"Stock market rally raises cautious, anxious hope among investors," and "Wall Street Journal and Birinyi Associates are lying about P/E ratios," and "Laszlo Birinyi provides insight on his fantasy price/earnings computation.s"

None of this has changed. We're still in a bear market rally, and it's not unusual or surprising. During 1929-32, the market fell 90%, and that included several rallies, one of which was longer and larger than the one we're in now.

Take a look at the last of the three articles above, and read the section about the "Principle of Maximum Ruin," and the quote from Galbraith's book.

You're in a highly emotional mood, and that's exactly the right mood for people who are going to be victims of "Maximum Ruin."

If you want other people's opinions, feel free to join the Generational Dynamics forum, and express your concerns there. This kind of discussion -- pros and cons -- appears regularly, especially in the Financial Topics thread.

There are people in that thread who have been investing and making money (especially Gordo, freddyv and Higgenbotham), but they have very complex short/long strategies that I wouldn't recommend to anyone but an expert. To anyone else, I strongly recommend preserving your cash and staying out of the market.

I wish you the best of luck whatever you decide to do, but if you buy long into this market, you're going to lose a lot of money.

For today's musical entertainment video, I've selected a great production number, "June is bustin' out all over" from the Rodgers and Hammerstein musical Carousel.

I selected this video because June IS busting out all over on CNBC, Bloomberg, WSJ, and other financial media, where the politicians, the journalists, the analysts and the investors are all bustin' out with sap.

For those of you who are bustin' out with song over the current stock market bear market rally, please remember that the festivities in the play Carousel didn't end very well either.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (5-Jun-2009) Permanent Link
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China's people commemorate the Tiananmen Square massacre, June 4, 1989

The paranoid Beijing government has been panicking as June 4 approaches.

The Chinese Communist Party (CCP) has been rounding up dissidents, sticking them into jail with no charge and no trial. The CCP has shut down Twitter in China. It's also blocked Flickr and YouTube, and other international sites. E-mail messages containing the numbers 6 and 4 have been blocked for weeks.

What is the CCP afraid of? Are they really that scared of a few tweets?

Yes, they are. The Beijing government is easily the most paranoid government in the world. They're scared to death of their own people. They're afraid that the Chinese Communist Party will dissolve, just like the Russian Communist party did in 1991, and they're afraid that they'll lose their élite positions, and actually have to work for a living.

I watched the Tiananmen Square demonstrations on CNN in 1989. Nobody had ever seen anything like it. What I remember are scenes of millions of students arriving on bicycles from all over the country, demonstrating in Tiananmen Square in the heart of Beijing for democratic reform and an end to corruption. It was so huge that it couldn't have happened anywhere but in China. It was mostly a party atmosphere, with jubilant students protesting government policies and demanding greater freedoms.

However, May 15 caused a change in mood on the part of the government. Soviet leader Mikhail Gorbachev was visiting Beijing for a state visit, and government officials were humiliated and embarassed when students protested and blockaded streets, forcing a cancellation of plans to welcome him in Tiananmen Square.

CCP leaders were furious. They made plans to have the army bring the demonstrations to a halt. On the night of June 3/June 4, the huge Chinese army fired on unarmed students and civilians. Thousands were killed.

College student blocks path of a row of tanks in Tiananmen Square in China, 1989
College student blocks path of a row of tanks in Tiananmen Square in China, 1989

If you have five minutes, then watch the Frontline video on the Tiananmen massacre. This is one of the most dramatic videos you'll ever see. Pay particular attention to what happens at the end, when a young man stands in front of a line of tanks, and they all stop.

It's hard to overestimate the impact of this massacre. Mao Zedong had always said that "The Chinese army loves the Chinese people." But here, the Chinese army fired on unarmed Chinese people, in a mass slaughter. The students couldn't believe what was happening -- that the Chinese army was killing them with tanks and live bullets. And yet, that's what happened.

Even so, it's only a coincidence that the outside world knows so much about what happened. Thanks to the visit by Mikhail Gorbachev, there were many representatives of the international press who photographed and filmed these events, which they found as astonishing and unbelievable as the students did.

Since then, the CCP has done everything possible to suppress any mention of the Tiananmen massacre. Today's Chinese youth know absolutely nothing about it, since even talking about it can get you arrested.

Generational interpretation of Tiananmen massacre

And yet, the Tiananmen massacre is the most significant event in Chinese history since the end of the Communist revolution / civil war that ended in 1949. Perhaps no one in China is allowed to talk about it, but everyone over age 25 remembers it, and it still affects the thoughts of everyone.

The CCP panicked in 1989 for several reasons:

A little later, the Soviet Union collapsed in 1991, and the Soviet Communist Party was dissolved. The was an enormous shock to the CCP, who had previously believed that they were politically invulnerable.

These fears lead to the massacre, and sent China spinning in a new direction that's at the heart of the China's political problems today.

Awakening era climax events

In Generational Dynamics theory, the Tiananmen massacre was an Awakening era climax event.

A generational Awakening era seems almost always to climax with an event that defines a winner between the older and younger generations. This is sometimes called a "bloodless coup" or a "velvet revolution" or an "internal revolution."

A recent example in American history was the resignation of President Richard Nixon in 1974. This resignation firmly established the political victory of the young Prophet generation (the Boomers) over the older Hero generation (the GIs).

The younger generational almost always "wins" the Awakening era political conflict for obvious reasons -- the older generation dies off, and the kids in the younger generation get their way. But it doesn't always happen like that.

The 1989 Tiananmen Square massacre is a significantly different kind of Awakening era climax -- different because the older Hero generation won, and they won it by slaughtering the students.

A victory by the older generation in an Awakening era is extremely dangerous for a country. It means that the Unraveling era will be spent using violence and force to suppress dissent and enforce the unpopular will of the previous Hero generation. It means a major succession crisis when the next Crisis era arrives, since the older generation is ready to retire, and the younger generations have no governing experience.

Another recent example is Burma (Myanmar). Recall that there were brutal army attacks on demonstrators -- most of whom were unarmed Buddhist monks -- in 2007, when they commemorated the nationwide demonstrations by the "88 generation," beginning on August 8, 1988 (8/8/88). Those demonstrations were also brutally suppressed by a Burmese army massacre of civilians.

It won't be long now before the Beijing government pays the price for the 1989 Tiananmen Square massacre. From the point of view of Generational Dynamics, China is headed for a major civil war with absolute certainty.

There are tens of thousands of "mass events" in China every year -- regional anti-government demonstrations involving dozens, hundreds or thousands of people. The CCP's large security force are trained to deal with these regional demonstrations, using whatever force is necessary.

But the CCP is scared to death of these demonstrations, because they know that one day soon, one of these demonstrations will metastasize into a nationwide rebellion. And when that day arrives, the CCP will no longer be able to pretend that the Tiananmen Square massacre never happened.

(Comments: For reader comments, questions and discussion, see the China thread of the Generational Dynamics forum.) (4-Jun-2009) Permanent Link
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