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Generational Dynamics Web Log for 18-Sep-2008
Panic selling may be close, as money market fund "breaks the buck"

Web Log - September, 2008

Panic selling may be close, as money market fund "breaks the buck"

Ordinary people with 401Ks will start losing their investments.

For the average man trying to raise a family and hoping that his 401K and other investments are safe, the year-long credit crisis, with its talk of "collateralized debt obligations" and "credit default swaps" has been something that affected only major institutions, not him.

For him, the soothing words of government officials that "the fundamentals are sound" and "nobody has lost money in an FDIC-insured account in 50 years" have been all he needed to continue to trust that the "system" is OK, and that he and his family are OK. In particular, he felt that his money market funds are ok.

Now a money market fund has announced that it will "break the buck." The value of its assets has fallen sharply, thanks to big investments in the now bankrupt Lehman Brothers.

The Reserve Primary Fund, run by the New York-based Reserve Management Corp., is reducing the value of its shares from $1.00 per share to 97 per share. This means that a person with a 401K who had $10,000 invested yesterday has only $9,700 today. Actually, he can't get his money out at all, so really he has no money today.


Market summary, 17-Sep-2008
Market summary, 17-Sep-2008

There's panic in the air. The soothing words of politicians are no longer working. People no longer worry about whether they can earn % more interest; they're worried about losing their money.

Several commentators have said that there's anecdotal evidence that people are already pulling money out of their money market funds, and S&P is keeping its eye on 9 other money market funds that may be close to the same decision, thanks to heavy investments in Lehman.

A lot of people where hoping that the bailouts of Fannie and Freddie, and then of AIG would end the problems. I heard some total idiots on CNBC Wednesday say that stock prices are poised to take off.

But, Dear Reader, nothing has changed. ABSOLUTE NOTHING. The real estate bubble is still collapsing. Thanks to "resets" in adjustable rate mortgages, the foreclosure rate will continue at least well into 2010. There's no question about this. Bailing out AIG has NOTHING to do with that. And price/earnings ratios are still at astronomical levels. Bailing out AIG has nothing to do with that either.

You have to understand, Dear Reader, that NOTHING has changed. This cannot possibly get better. It MUST get worse, MUCH worse. It's a mathematical certainty, no matter what the idiots on CNBC or in Washington or on the campaign trail say.

As we've said many, many times, 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 described a generational crash as an elemental force of nature, like a tsunami. There will be millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly in a state of total mass panic, trying to sell all at once. It's impossible to predict the date when that will happen, but it's going to happen with absolute certainty.

It's worth noting that at the end of Wednesday's trading session, the Dow Industrials index was 26% below the high that occurred last October, as you can see from my Dow Jones historical page. At this depth, a massive panic becomes increasingly likely. (18-Sep-2008) Permanent Link
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