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


Generational Dynamics Web Log for 21-May-2010
21-May-10 News -- S. Korea accuses N. Korea of sinking warship

Web Log - May, 2010

21-May-10 News -- S. Korea accuses N. Korea of sinking warship

Market selloff confuses financial analysts.

South Korea accuses North Korea of sinking warship Cheonan

The South Korean warship Cheonan was sunk on March 26 by an explosion, killing 46. As we've been reporting for weeks, South Korean President Lee Myung-Bak has carefully avoided accusing the North of being responsible for the explosion, for fear that merely saying so would also compel him to a declaration of war.

But now that time has ended. On Thursday, South Korea's Joint Civilian-Military Investigation Group (JIG) released a report citing "overwhelming evidence" that the Cheonan was sunk by a North Korean torpedo. And the dramatic conclusion was reached not by the South Koreans alone, but including experts from the United States, Australia, Britain and Sweden.

As we've described in the past, the evidence initially pointed to a torpedo that exploded BELOW the ship, creating a shock wave that split the the ship in two. A torpedo shock wave, it turns out, is far more devastating than a direct hit by a torpedo.

Here are some of the conclusions, as reported by BBC (or full report PDF):

"A shockwave and bubble effect caused significant upward bending of the CVK (Center Vertical Keel), compared to its original state, and shell plate was steeply bent, with some parts of the ship fragmented.

On the main deck, fracture occurred around the large openings used for maintenance of equipment in the gas turbine room and significant upward deformation is present on the port side. Also, the bulkhead of the gas turbine room was significantly damaged and deformed.

As for conclusive evidence that can corroborate the use of a torpedo, we have collected propulsion parts, including propulsion motor with propellers and a steering section from the site of the sinking.

The evidence matched in size and shape with the specifications on the drawing presented in introductory materials provided to foreign countries by North Korea for export purposes...

The marking in Hangul, which reads ["No. 1" in English], found inside the end of the propulsion section, is consistent with the marking of a previously obtained North Korean torpedo. The above evidence allowed the JIG to confirm that the recovered parts were made in North Korea."

Apparently the final confirmation came during the last week, when the South Koreans trawled the sea floor beneath the site of the explosion and were able to recover torpedo parts that could be unambiguously identified as North Korean.

Now that President Lee has arranged for almost two months of investigation to give tempers time to cool, we're about to see if tempers have in fact cooled.

As expected, the North Koreans are humiliated by this accusation, and they're responding accordingly. A rare public statement from North Korea's high level National Defense Commission said that the investigation was "a sheer fabrication orchestrated by the group of traitors in a deliberate and brigandish manner to achieve certain political and military aims," according to S. Korea's JoongAng news service.

The North Koreans also implied that any retaliatory action would be considered an act of war. "The world will clearly see what a dear price the group of traitors will have to pay for the clumsy 'conspiratorial farce' and 'charade' concocted to stifle compatriots."

According to the article, analysts in Seoul considers these threats to be mostly rhetorical, since no pre-emptive strike is threatened.

American State Department spokesman P.J. Crowley called the attack an "unprovoked and unwarranted act," according to the Washington Post, and that "clearly this was a serious provocation by North Korea and there will definitely be consequences because of what North Korea has done."

China, on the other hand, says that it has "noted" the investigation results, and and is "calling on all parties to exercise calmness and restraint over relevant issues of the sinking," according to Xinhua.

The most likely scenario seems to be that the U.S. will call on the United Nations Security Council to condemn the North Koreans and to impose new sanctions. The Chinese will then have to decide whether to veto such a motion. Also, the United States could announce unilateral sanctions. However, such sanctions would be one of the provocations that the North Koreans threatened to start a war over.

North Korea's biggest backer is China, and they'll play a crucial role in mediating the crisis, to prevent it from spiraling out of control.

However, the South Koreans are not going to allow anything like this to happen again, and tensions are very high. A miscalculation on any side could lead to a military confrontation.

Market selloff stuns pundits

Thursday's big market selloff seems to have put a lot of pundits into a state of shock. The recent narrative has been first that Greece's economy is too tiny for a default to affect the American economy. Now the narrative is that, despite Merkel's apocalyptic speech on Wednesday, Europe's economy will easily survive the current crisis, without having too much effect on the US economy. The greater narrative is that we've learned a great lesson from the Lehman failure, and that now we know exactly how to prevent any further crisis.

From the point of view of Generational Dynamics, we've learned absolutely nothing from the financial crisis of the past three years, and that all the abuses that led to it are still being practiced in even greater form.

A major exception of the general narrative is famous bear market strategist David Tice. He was on Bloomberg TV for a long time on Thursday afternoon, and he's predicting a crash, based on Von Mises theory and the Austrian school. I found it interesting that he predicted that the "fair value" for the S&P is around 500, that the market will overshoot and fall to 400. Those figures are similar to mine, and I wonder how he arrived at them. Perhaps he's read my article "How to compute the 'real value' of the stock market," or perhaps he arrived at the figures independently the same way I did.

Generational Dynamics predicts that a panic and stock market crash must come at some point, by the Law of Mean Reversion, because the stock market has been historically overpriced since 1995.

Additional links

Tens of thousands of workers protested non-violently in Athens on Thursday, protesting austerity measures, as unions conducted a nationwide strike. CS Monitor

The German Bundestag will vote on Friday whether to approve the $1 trillion eurozone bailout. Bloomberg

German chancellor Angela Merkel is "criminally incompetent" for surprising everyone, including her allies, with her unexpected announcement of banning naked short sales. French Finance Minister Christine Lagarde says that France will not go along with the German decision. EuroIntelligence

Jobless claims rise by largest amount in 3 months. AP

"Synthia" is the name give to a cell of artificial life created in the laboratory from synthetic DNA. J. Craig Venter, who headed the team creating the cell, says, "This takes us across that border, into a new world." Times Online

(Comments: For reader comments, questions and discussion, see the 21-May-10 News -- S. Korea accuses N. Korea of sinking warship thread of the Generational Dynamics forum. Comments may be posted anonymously.) (21-May-2010) Permanent Link
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