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Generational Dynamics Web Log for 1-Jul-2008
Blogger Watch: Michael "Mish" Shedlock comes over to the dark side

Web Log - July, 2008

Blogger Watch: Michael "Mish" Shedlock comes over to the dark side

Referring to 1929, Shedlock now says, "History is about to repeat."

Over the last couple of years, I've been very critical of the economic bloggers for refusing to face up to the consequences of their own analyses. They would post blog entries telling of disastrous economic data, but then talk only about nothing more serious than a recession.

It was just a couple of months ago that I posted an article, "Blogger watch: Hellasious at SuddenDebt gets it right," in which I was mocking Michael ("Mish") Shedlock's blog for predicting nothing stronger than "the U.S. slipping in and out of recession for a prolonged period of time, perhaps 3-4 years or more."


Michael "Mish" Shedlock
Michael "Mish" Shedlock

But now, Shedlock apparently has had an epiphany. Not only is he predicting a return to 1929, he's actually giving it a generational twist. People who have said to me that I'm on "the dark side of the road" should know that it's beginning to get crowded over here.

In his Monday posting, Deflationary Hurricanes to Hit U.S. and U.K., he says the following:

"It will be hard for the US and UK to avoid a depression.

What started as a tropical storm called "Subprime" has intensified in magnitude to engulf Alt-A, HELOCs, credit cards, commercial real estate, municipal bonds, corporate bonds, and the stock market, just as baby boomers are headed for retirement.

If you prefer, you can think of this as Many Hurricanes, Many Eyes. ...

Most do not even understand the nature of the storm that is about to hit. ...

Property values are crashing, unemployment is rising, wages are falling, global wage arbitrage is king, and most importantly Peak Credit Has Arrived.

It is impossible to get inflation out of that mix. Berananke could cut interest rates to zero tomorrow and it would not cause inflation, at least as properly defined: a net expansion of money and credit. Banks are strapped for cash. They cannot lend. Businesses do not want to borrow. There is overcapacity everywhere. The Shopping Center Economic Model Is History.

I struggle to see how anyone can get inflation out of that mix. Last Thursday when the stock markets were in a freefall, I asked Is The Inflation Scare Over Yet? Well, I guess it's not. ...

Ben Bernanke at the Fed, Mervyn King at the Bank of England, and Jean-Claude Trichet at the ECB are not in control of what is about to happen. When it comes to commodity prices, peak oil and China's willingness to allow its economy to overheat are going to be the driving forces. Trichet can hike all he wants and it will not matter much to the price of oil. However, it may crush individual economies in the EU. ...

Implications of Peak Credit

When it comes to the collapse in credit, the above Central Banks are powerless to do a thing about it. This is to be expected now that we are on the backside of Peak Credit.

The saturation point has been reached. It took decades but we have finally arrived. None of the financial engineering jobs that fueled this credit boom will ever be needed again. SIVs, Conduits, Toggle Bonds, Covenant Lite loans are all dead for years, more likely decades to come. Add to that liar loans, Pay Option Arms, insane leverage, and numerous other ridiculous lending arrangements. And if those things are not coming back, we do not need Wall Street shills to securitize that garbage and pitch it to unsuspecting suckers.

In addition to financial engineering jobs, there was a boom in commercial real estate, home depots, remodeling companies, landscaping, furniture, appliances, plumbing, heating, air conditioning, restaurants, and even things like grass seed.

There is no source of jobs to replace what has been lost and what will be lost. Discretionary spending is dead. Boomers about to retire are about to get religion. Sadly, it's too late. Savings they thought they had in their house, have now vanished into thin air. It was all a mirage in the first place, but mountains of credit has been extended on the basis of that mirage. Trillions of dollars of imagined wealth has gone up in smoke. Trillions of dollars more are about to.

Deflation Has Set In

It is amusing that in the face of this carnage, many are still screaming inflation, stagflation, or even hyperinflation simply because food and energy prices are rising. Deflation is here and now in the US. Deflation is knocking on the door of the UK and Eurozone. And there is nothing that can be done about it.

Can The Fed Print Its Way Out?

Some will insist that I am wrong, that the Fed can print. Well the Fed can print, but the Fed cannot spend. In addition, the Fed cannot give money away, nor would the Fed even if it could. Finally, the Fed cannot force banks to lend or businesses or consumers to borrow.

Bank credit is contracting with the Fed Funds rate at 2%. Bank credit would not be going much of anywhere even at 0% in my estimation. The reason is simple: banks are insolvent!

The Fed is like the powerless man behind the curtain in the Wizard of Oz. Once peak credit sets in, all the Fed can do is bluff. The notion of a helicopter drop is pure nonsense. ...

Attitudes Lead The Way

It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. That is the nature of the game. People have to forget what a depression is like to bring about the conditions that cause them. And they did. And they made the same mistakes over again, except larger.

The madness of crowds, however, can only go so far. A significant reversal is now underway. The secular peak in consumption has been reached. A reversal in attitudes towards consumption started with houses, but itís spreading to cars, boats, and even Starbucks coffee. It will take a long time for attitudes to get back to equilibrium. And attitudes, like pendulums, will not stop at equilibrium once they get there.

The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none. History is about to repeat."

What's particularly interesting about this is the generational twist that he puts on it. (Do you suppose he's read this web site?) He says that "People have to forget what a depression is like to bring about the conditions that cause them." That's the heart of generational theory.

Actually, the Great Depression is being mentioned more and more these days. Incredibly, it was actually discussed for 10-15 seconds the other day on CNBC, where all such talk is normally forbidden. And a Washington Post article on Friday said that we have a "housing slump more severe than any since the Great Depression."

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

These are called "generational crashes" because they occur every 70-80 years, just as the generation of people who lived through the last one have all disappeared, and the younger generations have resumed the same dangerous credit securitization practices that led to the previous generational crash. After each of these generational crashes, the survivors impose new rules or laws to make sure that it never happens again. As soon as those survivors are dead, the new generations ignore the rules, thinking that they're just for "old people," and a new generational crash occurs.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (1-Jul-2008) Permanent Link
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