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


Generational Dynamics Web Log for 7-Oct-2008
Markets plummet deeply around the world.

Web Log - October, 2008

Markets plummet deeply around the world.

But Wall Street investors are giggling with glee.

The European banking crisis continued on Monday as the country of Iceland faced a financial meltdown, and suspended all trading in financial shares.

Last March, I wrote that the country of Iceland was close to financial default, because for several years, Iceland has been acting like a hedge fund, instead of a country, and the króna ("krona" or "crown") currency was crashing.

The problems in Iceland set the stage for the day.

Overnight inter bank lending rates rose sharply, demonstrating that the $700 billion bailout bill, which just became law, is not having the desired effect of motivating banks to trust one another and lend money to one another.

Tokyo had already suffered its worst day in years. Russia shut down its stock markets 3 times, and finally ended 20% down, its worst day in history. Throughout Latin America, stock markets had big losses of as much as 17%.

World stock market indexes, Sept 1 to Oct 6, 2008 <font size=-2>(Source: AP/</font>
World stock market indexes, Sept 1 to Oct 6, 2008 (Source: AP/

In European markets, there was a stampede to sell. Britain's FTSE lost 7%, the worst since the Panic of 1987. Markets in Germany, Italy, France and Spain were down 4-5%.

Appearing on the NBC Today show on Monday morning, CNBC's Jim Cramer said he expected as much as a 20% further decline in the stock market and, "Whatever money you need for the next 5 years, take it out of the stock market."

With regard to corporate earnings, he said, "The previous quarter, the second quarter, was a bad quarter, but it will look good compared to the coming quarter."

Market summary, 6-Oct-2008
Market summary, 6-Oct-2008

So on Wall Street, there was a lot of anxiety, but there was also a fair amount of glee, because pundits and investors felt that their fantasy "capitulation event" might finally be occurring, meaning (in this fantasy) that the market would now start going up again, and the bubble would grow again.

The Dow Industrials index fell 800 points in the morning, to well below 10,000 for the first time in years.

We interrupt this narrative for a brief commercial interruption from 1999. I'm sure you'll enjoy it:

Now, back to our show.

In the afternoon, the market regained about 400 points, leaving a lot of people scratching their heads, since there was no special news in the afternoon.

There was a lively discussion on Monday in the Financial Topics thread of the Generational Dynamics forum. One person wrote,

"I could not be more pleased with what I saw today from a traders perspective. We got a beautiful key reversal on massive volume."

Another wrote:

"I had lunch with my co-workers today. Some of them said waiting for some points to jump in the market and pick up some bargains. I think some of these guys may regret not jump into the market this afternoon by seeing the come back."

After the market closed, an analyst on the BBC was asked why the market came back after such a disastrous fall. He said,

"That's a terrific question - we're trying to figure that out ourselves. The pundits are saying that someone with deep pockets came in and started buying, but we don't know who. The stocks that are considered recession-proof -- McDonald's, Pepsi, Coca-Cola -- led the comeback."

What's clear is that the Principle of Maximum Ruin is alive and well. These people are going to lose a lot more money.

The Fed has expanded its liquidity program this morning. European central banks are doing the same. They've already done so much, I didn't think that was possible. But it's not helping. Investors have finally caught on to the fact that the psychological boost of a liquidity injection doesn't last more than a day or two.

It's been amazing to watch this, since I set up the Generational Dynamics web site in 2002. I couldn't foresee the details of what was going to happen, but I applied generational theory to the situation, as well as well-established laws:

I didn't make up these laws, but I've been applying them ruthlessly for years, to predict what's happening now. And, not surprisingly, the predictions derived from these laws have all turned out to be brutally true.

And the fall has much farther to go. Here's Friday's version of the graphic that appears on the bottom of the home page of this web site:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 3-Oct-2008. <font face=Arial size=-2>(Source: MarketGauge ® by DataView, LLC)</font>
S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 3-Oct-2008. (Source: MarketGauge ® by DataView, LLC)

As you can see, P/E ratios (also called "valuations") are still at really astronomical heights.

Incredibly, the P/E index hasn't even gotten as low as it was back prior to March. It's been at astronomical levels since 1995, and now appears to be the time when the Law of Mean Reversion is applying itself. That means that it's going to be falling well below 10.

All this is lost on the pundits, however. Many of them see this selloff as good news, because it's a "capitulation" event that will cause the market to "snap back" quickly. There's just no limit to the stupidity of these people.

One snap back that we are seeing is the snap back of the dollar, especially against the euro. Those of you who have told me that the dollar would become worthless can now begin to see why you were wrong. The dollar is in a deflationary spiral, which makes it increasingly valuable, while other currencies, including the euro, are collapsing.

I've received a lot of questions about this issue. It's true that America is deeply in debt, inasmuch as we owe China, Japan and other foreign countries far more money than we can ever pay back.

But that's not the issue. The dollar has been the reserve currency since at least the 1930s, and there are huge amounts of dollars in countries around the world.

In the case of Germany's Weimar Republic, which suffered hyper-inflation in the 1920s, few people outside of Germany owned marks. In the case of Zimbabwe today, no one outside of Zimbabwe owns Zimbabwe dollars.

But there are huge amounts of dollars outside of America -- Europe, China, the Mideast -- and all of those holders are as committed to the value and integrity of the dollar as America is.

Forget about the dollar as an American currency. Think of the dollar as a world currency. Even if America no longer had any dollars whatsoever, the dollar would still be valuable on international markets as a world currency.

People have accused me of being "nationalistic" when I write this about the dollar, but that has absolutely nothing to do with it. It's not nationalistic to say that the dollar has become an international world currency, whose value no longer even depends on how many dollars America has. America is just one holder of dollars, among hundreds of other countries, and the value of the dollar is determined by the collective value assigned to it by all those hundreds of countries.

For that reason, the dollar will continue to strengthen against other currencies, as the deflationary spiral continues.

The only other currency I'd be willing to bet on is the yen. Why? Because Japan has already gone through a generational crash in 1990, and they're a nation of survivors of that crash. I'd bet that if there were a way to take a survey of Japanese mattresses, a lot of them would be found to be stuffed with cash.

That means that cash is king. And you should take Jim Cramer's advice: If you're going to need any money in the next five years, then take it out of the stock market, and keep it in cash.

According to my Dow Jones historical page, the Dow Industrials index is now at 70% of its high on October 9 of last year. That's putting an enormous strain on money market funds, hedge funds, endowments, and everything else, and because of high leveraging in the past, it may take just a few more straws to break the camel's back.

(Comments: For reader comments, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (7-Oct-2008) Permanent Link
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