World Moving towards the final War, the 3rd Great War.

World Moving towards the final War, the 3rd Great War.

“Watching the pot come to a boil”

16-Aug-10 News — U.S. and S. Korea begin massive military exercises
Boomers threaten the U.S. economy

U.S. and S. Korea begin massive military exercises

The United States and South Korea will hold 10 days of joint military exercise, beginning Monday, and continuing through August 26. The exercises are called the Ulchi Freedom Guardian (UFG) war games, and they’ve been held every year to maintain readiness in case North Korea invades South Korea. The 1950s Korean war ended in a stalemate, and technically the two countries are still at war.

The participation will be massive — about 30,000 American troops and 56,000 South Korean soldiers, according to VOA. However, many of the participants will take part remotely, using computer simulations and communications.

The nuclear-powered aircraft carrier U.S.S. George Washington will take part, and the U.S. has said that some of the exercises will take part in the Yellow Sea.

The war games take place as tensions have increased substantially on the Korean peninsula, after the South Korean warship was sunk by an explosion on March 26, killing 46, and later investigations indicated that the sinking was caused by a North Korean torpedo.

As usual, the North Koreans put out a statement filled with angry bluster. Yonhap quotes the North Korean statement as saying, “Now that the uproar of the reckless military drill aiming at our republic has heightened to an extreme … our military and people will wield the iron hammer of a merciless response. Our military’s reaction will be the worst punishment anyone has ever experienced.” Blah, blah, blah.

China’s state-controlled media Xinhua also reacted angrily, saying, “The real intention of the U.S. maneuvers in the waters of Northeast Asia, the commentary said, is to consolidate the U.S.-South Korea and U.S.-Japan military alliance and boost U.S. military presence in the region, and therefore intimidate and contain China. Washington’s intention to contain China becomes clearer as it tries to interfere in the South China Sea disputes and strengthen its military presence in Southeast Asia, said the magazine. To a larger extent, the U.S. moves reflect the Obama administration’s ambition to return to Asia to seek dominance of regional affairs.”

However, another article in the Chinese media downplays the importance of the exercises. The Global Times says that “Worries over US aircraft carrier [are] overstated,” and that “the US sending a carrier to the Yellow Sea just demonstrated that Sino-US relations are not as intense as some people argue.” The article points out that an aircraft carrier would be extremely vulnerable to missile attack sailing so close to the Chinese mainland, and the fact that the U.S. is willing to risk sailing into the Yellow Sea “is of more symbolic significance than practical significance.”

The article adds that the U.S. is not planning any military move against China because “At home, the US economy is weak and debts are piling up; while overseas, the prospect of failure in Afghanistan grows ever more likely.”

It adds, “As the US extends its battle line, the limited number of US military is like a stretched dumpling wrapper around Europe, Middle East, South Asia, and now even East Asia. The stuffing of the dumpling is swelling, while the wrapper is getting thinner and thinner.”

Boomers threaten the economy

That was the headline on the home page of on Sunday.

According to the article (Access), the Boomers ARE threatening the U.S. economy. How? By spending less!

Boomers spending less <font face=Arial size=-2>(Source: WSJ)</font>
Boomers spending less (Source: WSJ)

According to the article, Boomers haven’t saved for retirement, no one will hire them, and they’ve lost money in the stock market. The result is that they have far less money to spend. For several decades, Boomers have been the main consumer spending engine of the economy, and if Boomers cut back, then the economy will suffer.

Additional links

Face to face talks between Israelis and Palestinians may begin again soon, after having been broken off two years ago. LA Times

On Sunday, Japan, South Korea and China commemorated the 65th anniversary of Japan’s surrender, ending World War II. Associated Press

Deadly smog still fills the air in Moscow from the wildfires. Guardian

VisitBritain research provides tips for Brits who want to be the best hosts possible to foreign visitors to the 2012 Olympics in London. Some samples: “A smiling Japanese person is not necessarily happy.” “When meeting Mexicans it is best not to discuss poverty, illegal aliens, earthquakes or their 1845-6 war with America.” “Never call a Canadian an American.” BBC

(Comments: For reader comments, questions and discussion, see the 16-Aug-10 News — U.S. and S. Korea begin massive military exercises thread of the Generational Dynamics forum. Comments may be posted anonymously.) (16-Aug-2010) Permanent Link

15-Aug-10 News — Talk of a coup in Pakistan
Bond yields for Greece, Spain and Ireland once again at crisis levels

Pakistan floods become epic disaster

Saturday was the 63rd anniversary of Pakistan’s Independence Day, but the celebrations were muted by the unfolding and growing catastrophe facing the country, with 20 million people were homeless from the floods, according to Pakistan’s prime minister Yousaf Raza Gilani, and the torrential monsoon rains are continuing. Cholera is spreading, and many isolated groups of people are starving because the floods have destroyed food supplies.

U.N Secretary-General Ban Ki-moon is visiting Pakistan to see the devastation for himself. VOA quotes him as saying, “We will try to mobilize all necessary assistance. And remember that the whole world is behind the people of Pakistan in this time of trial.”

The United Nations has appealed for $459-million to deal with the immediate aftermath of the floods, saying billions of dollars will be needed in the long term. However, aid organizations are surprised that financial aid has been very slow in coming.

In his Independence Day speech, Gilani compared the ongoing disaster to the huge genocidal war between Muslims and Hindus that followed the 1947 Partition that created Pakistan and India. Pakistan’s Daily Times quotes him as saying, “The nation will confront the challenges as it did at time of Partition, with the blessings of Almighty Allah. This time too we shall succeed.”

Little help from the international community

In the speech, Gilani appealed to the nations of the world to aid Pakistan, but little aid so far has been forthcoming.

This has been a shock to aid organizations, who compare the aid received from individuals for the Pakistan floods — about $10 million — to the hundreds of millions of dollars donated for the South Asia tsunami in 2004 or the Haiti earthquake earlier this year, according to the Telegraph.

At the governmental level, the United States has been leading the way with $80 million in aid, and the UK is in second place, but many other countries have contributed little or nothing. The Daily Times asks, “Are Saudis, Iranis not Pakistan’s friends anymore?” Except for Kuwait, Turkey and the UAE, no Islamic country has donated a penny to help Pakistan.

Saudi Arabia, which has given nothing to its Pakistan ally, donated $50 million to aid for the Haiti earthquake, according to an analysis by the Hindustan Times. The article provides three reasons why aid has been slow in coming:

  • Pakistan’s government appears to be incompetent in handling the relief efforts for the floods, and would only waste the aid money.
  • Corruption is a big problem in Pakistan’s government. This is something I hear all the time on the BBC. The fear is that any aid money will simply go into politicians’ pockets.
  • The media have not portrayed the disaster well.

Another reason is provided by the Daily Times article cited above. It seems that during the 2005 Kashmir earthquake, India offered $500 million in aid to Pakistan, but “the offer was refused by Pakistani authorities in the first place and whatever was allowed in was let to rot at security checkposts on the border.” This snub would not be easily forgotten by the Indians.

I personally would add one more reason. In the past six months, the mood of the world has changed. At the time of the Haiti earthquake early this year, it was widely believed that the financial crisis was over, and that the economy would experience a “V-shaped recovery” in the Spring, with a surge in corporate hiring.

Today, that mood has almost reversed. Both consumers and corporations are holding on to cash for fear that business will collapse again or that joblessness will go up again. (See “12-Aug-10 News — Wall Street turns pessimistic.”)

This change in mood is one more reason for the reluctance to provide aid to Pakistan.

Will Pakistan’s government survive?

As I reported a few days ago, a protestor threw shoes at Pakistan’s President Asif Ali Zardari during a speech in Britain last week. Now I’m shocked to read in the Guardian that several Pakistan cable television stations have been shut down for trying to broadcast the story of the shoe-throwing. There are additional bans affecting news coverage of the relief efforts, and this is on top of violence being perpetrated against some journalists.

When a government resorts to this kind of newspaper censorship, it’s a sign that the politicians believe that the government is in trouble.

A constant theme of public criticism in the past week has been that Pakistan President Asif Ali Zardari didn’t cut short his trip to France and Britain when the floods became disastrous.

Zardari is an odd figure in Pakistan’s government. He would never have become President, had it not been for the assassination of his wife, Benazir Bhutto. Zardari is a Shia Muslim, in a largely Sunni Muslim government, where most of the power is in the hands of the army and the intelligence services, both largely Sunni organizations. And, of course, the Taliban are Sunni extremists.

Pakistan has had a number of coups in the last few decades, so it’s not surprising that a coup is being discussed now. Thus, the Karachi News says that there’s talk of the Pakistan army ‘plotting the overthrow’ of the Zardari government.

So far, this is just talk and rumor. But there’s no doubt that Zardari is less popular than ever, and it would not be surprising at all if he were forced out of office.

Additional links

Corporations are going on a “borrowing binge” by issuing high-risk “junk bonds” at very low interest rates. Even though the bonds are very risky, investors are snapping them up, hoping to recover money they’ve lost in the stock market. WSJ (Access)

Something similar is happening in Europe, as yields on German bonds are falling, while bond yields for Greece, Spain and Ireland are once again reaching crisis levels. Bloomberg

India has reimposed a curfew in Kashmir, after four more protestors were killed when security forces fired into the crowd. Reuters

Russia’s Foreign Ministry has formally thanked the United States for help in fighting the wildfires. Ria Novosti

Ten reasons why a stock market crash may be coming. #1: P/E ratios are too high. #2 The Fed is getting nervous. #3: Too many people are bullish. #4: Deflation is already here. Wall Street Journal (Access)

(Comments: For reader comments, questions and discussion, see the 15-Aug-10 News — Talk of a coup in Pakistan thread of the Generational Dynamics forum. Comments may be posted anonymously.) (15-Aug-2010) Permanent Link

14-Aug-10 News — Germans selling submarines to Greece and Portugal
German prosecutors are investigating corruption

Prosecuting investigating sales of German submarines to Greece and Portugal

The near-default of Greece’s government several months ago forced the EU to agree to a huge bailout. (See “11-May-10 News — Europe’s super-nuclear bailout.”)

And as we reported yesterday, the bailout hasn’t helped much, as Greece’s economy shows signs of collapsing.

Portugal has not yet come close to defaulting, but it’s one of the PIIGS countries (Portugal, Ireland, Iceland, Greece and Spain), and with a faltering economy and heavily in debt, many fear that it’s not far behind Greece.

Both countries are implementing severe austerity programs to reduce the debt, and try to stave off default. These austerity programs are creating enormous hardships for their people.

So why are these two countries purchasing German-built submarines and other weapons, with money that they don’t have? And why were some of these deals signed just as the bailout was being negotiated?

That’s what German prosecutors would like to know. Deutsche-Welle reports that they’re investigating corruption between German and Greek officials who sought to benefit from the bailout at a time when the German people were strongly opposed to it.

There were several large side deals, known as “offset contracts,” signed along with the submarine deal, though little is yet known about the details. They would work as follows: Germany provides bailout money to Greece; Greece uses some of the ;money to purchase submarines and other weapons systems from German firms; the German firms would invest part of that money in projects in Greece favored by the Greek government. The money is effectively laundered, and everyone gets to pocket something.

The investigation is spreading to Portugal, according to EU Observer, and is touching on some high-level EU officials.

Greece and Turkey
Greece and Turkey

The deal has some important historical significant for Americans. Greece and Turkey are perennial enemies, and a post-war conflict between them in 1947 led President Harry Truman to declare the Truman Doctrine, which essentially made America the Policemen of the World. (See “President George Bush talks about a ‘Third Awakening,’ but he has his history wrong” for details on how America became Policemen of the World.)

Since that time, Turkey and Greece went to war on the island of Cyprus, and almost went to war on other occasions. Greece is the largest importer of conventional weapons in all of Europe, and it’s thought that much of this weaponry is in preparation for a possible future war with Turkey.

(Comments: For reader comments, questions and discussion, see the 14-Aug-10 News — Germans selling submarines to Greece and Portugal thread of the Generational Dynamics forum. Comments may be posted anonymously.) (14-Aug-2010) Permanent Link

13-Aug-10 News — Greece’s economy goes deeper into recession
Worldwide heat prices surge after USDA lowers forecast

Greece’s economy goes deeper into recession than forecast

Deep into August, with seemingly half the world on vacation, it almost seems as if nothing is happening. And yet, bills continue to pile up, even in summer, and notes become due, and people still have to eat.

So it’s perhaps not too surprising that Greece’s economy is turning out to be worse than expected or predicted, after the huge European bailout in May, triggered by Greece’s impending financial default. (See “11-May-10 News — Europe’s super-nuclear bailout.”)

Greece's economy - growth rate - 2008 to present <font size=-2>(Source: Market Watch)</font>
Greece’s economy – growth rate – 2008 to present (Source: Market Watch)

As the graph shows, the growth rate of Greece’s economy turned negative in Q3 2008, and it’s been negative ever since.

On Thursday, Greece announced the biggest fall in recent times. Experts had predicted that Greece’s growth rate would hold steady at around -1.0%, but it now turns out that in Q2, the rate was -1.5%, according to MarketWatch.

What’s even worse is the overall trend since Q1 of 2008, which is clearly downward, and there’s little hope in sight of a revival.

Notice that the one time when the growth rate increased — in Q2 of last year — was the time when the U.S., China, Europe and other countries were pouring trillions of dollars in bailouts and stimulus packages into the global economy, resulting in last year’s stock market rally. But Greece’s economic growth only last one quarter, not even as long as the stock market rally.

Furthermore, the most recent collapse, in Q2 of this year, coincides with the collapse of many other economic indicators, as I’ve been describing for two months now, starting with “7-Jun-10 News — Globally, May was a month of ominous events.”

Early in 2009, I was expecting the world economy to keep collapsing, but I turned out to be wrong because of something like $10 trillion dollars in stimulus and bailout money injected into the world economy.

But nothing like that is about to happen now. People around the world are panicked about the high levels of government debt everywhere. Whereas Presidents Bush and Obama were able to get trillion dollar stimuluses and bailouts passed in 2008 and 2009, nothing like that is possible in 2010.

This mood is apparent from a survey of 57 economies published on Thursday in an article in the Wall Street Journal (Access). The economists were generally very pessimistic about the U.S. economy, but nonetheless most said that the economy doesn’t need any more fiscal or monetary stimulus.

The economic pessimism was increased even further on Thursday when new claims for unemployment insurance hit their highest level in six months, according to VOA. 484,000 people signed up for unemployment insurance last week, when the experts were hoping that the figure would fall to 400,000.

Generational Dynamics predicts that we’re headed for a major worldwide financial crisis, the worst in history, because the world has created an amount of debt astronomically larger than at any time in history.

Additional links

The U.S. Department of Agriculture (USDA) revised downward its global forecast for wheat product, by 2.3% less than July. Much of the downward revision was caused by Russia’s drought and the hottest summer in 130 years. Wheat prices surged 2.5% on Thursday, giving rise to fears of food riots. Associated Press.

The North Korean football (soccer) team that lost three games at the World Cup games this summer are being harshly punished by Kim Jong-il’s government. World soccer officials will conduct an investigation. LA Times

Floods in Pakistan are still growing, in a disaster of epic proportions. The rains have destroyed 500,000 tonnes of wheat and 500,000 tones of sugar, exacerbating the food shortages. Reuters

The commander of Iraq’s military has indicated that U.S. troops should not leave Iraq, since the Iraq army will not be ready to defend the nation until 2020. Long time readers will recall that I’ve said that it’s my expectation that the U.S. will not withdraw from Iraq until forced to by the Clash of Civilizations world war. Associated Press

The spreading revolt in Kashmir is causing India to reevaluate its strategy there, although there seem to be no answers in sight. NY Times

India is joining United Arab Emirates (UAE) and Saudi Arabia in threatening to shut down BlackBerry email and messenger services, unless the vendor, Research in Motion, makes the contents of encrypted messages available to the government. India’s deadline is August 31. Reuters

If you take a picture with a smartphone or a digital camera and post it on the internet, then you may be revealing more than you realize about yourself — specifically your location. These devices use the GPS capability to implant a “geotag” into the picture that an expert can use to determine where the picture was taken. NY Times

Turkey is being accused of using chemical weapons against PKK militants. Spiegel

The Arab League has issued a statement saying that the Palestinians’ “right to return” to their land in Israel will be on top of their list of priorities. Eurasia Review

Mexico hopes $270 million in social spending will help end Juarez drug violence. Fat chance. Washington Post

A team of French scientists have finally discovered how to drink champagne properly. Start by pouring it into a tilted glass.

(Comments: For reader comments, questions and discussion, see the 13-Aug-10 News — Greece’s economy goes deeper into recession thread of the Generational Dynamics forum. Comments may be posted anonymously.) (13-Aug-2010) Permanent Link

12-Aug-10 News — Wall Street turns pessimistic
World Health Organization says that swine flu pandemic is over

Markets fall as pessimistic mood takes hold

As usual, financial experts on tv on Wednesday looked at one another with puzzled expression and asked, “Why is this happening? There’s no news that we didn’t already know.”

Statements like that, which are very common, never cease to astound me. If you think about the mind frame of the person saying it, he obviously believes that stock prices have absolutely no meaning except the emotional state of the investor based on the news of the day. And these idiots give investment advice to other people!

Wall Street stocks fell roughly 3% on Wednesday. According to the NY Times, stocks fell because, “evidence is mounting that growth abroad is also slowing and may be unable to sustain the fragile rebound here.” A major reason for the pessimism, according to the article, is that the Federal Reserved released a report warning that “the pace of the nation’s recovery had slowed.” In addition, China’s economy is cooling, and American exports are faltering.

Thus, “The optimism had pervaded Wall Street only weeks ago has faded quickly. In its place is a growing realization of what many ordinary Americans have been feeling in their bones: this is not the economic recovery the nation had hoped for. Indeed, while the economy is growing again, it is growing too slowly to create many jobs or boost household incomes.”

What’s becoming clear is that the mood on Wall Street is changing as the effects of the multi-trillion dollar bailouts and stimulus packages wear off.

One interesting aspect of the increasing gloom is that even people making dire predictions are becoming more mainstream, according to an article several days ago in the NY Times. According to the article,

“In many smart-money circles, listening to bears has become fashionable, especially now that doubts remain about the sustainability of the euro zone, concerns grow that the United States may slip back into recession and that even the Chinese growth engine may seize up. But to some, the popularization of extremely dire forecasts suggests that the pendulum may have swung too far.“Nothing is ridiculous anymore,” said Philippe Jabre, a hedge fund executive in Geneva. “There is no doubt that these days extremely negative research is being tolerated more.”

Mr. Jabre said that most of the research that came his way had a distinctly negative bias and that finding actionable ideas with a positive spin was becoming far more difficult. “These guys are reinforcing a conviction among many who invest in hedge funds that they should remain scared,” he said.”

As long-time readers know, I realized in 2002 that we were headed for a new 1930s style Great Depression when I was eating lunch at the mall reading the Boston Globe, and I saw a graph of the Dow Industrials going back to the early 1900s. I took one look at it and said, “Ohmigod, the stock market is going to crash.” It was that obvious, just from the graph. (See “Updating the ‘real value’ of the stock market.”)

I was ridiculed for many years, but I must say that I almost never hear any ridicule these days. People are indeed scared, and they’re finally willing to listen.

Another issue is the debate between those who are predicting deflation and those who are predicting hyperinflation. It’s so obvious that we’re in a deflationary spiral that I can only ascribe predictions of hyperinflation to human perversity.

In fact, a recent article in the Wall Street Journal (Access) is entitled “How to Beat Deflation,” and provides investment strategies:

Investment strategies for deflation <font face=Arial size=-2>(Source: WSJ)</font>
Investment strategies for deflation (Source: WSJ)

My own recommendation, incidentally, is for everyone but the most sophisticated investors to stay out of the markets completely. Cash is king during a deflationary spiral, you should keep you cash in your mattress, in FDIC-guaranteed bank accounts, and in short-term treasuries.

However, even seeing an article like this in the Wall Street Journal shows how much the mood on Wall Street has changed.

World Health Organization declares that swine flu pandemic is over

Post-pandemic phase <font face=Arial size=-2>(Source: WHO)</font>
Post-pandemic phase (Source: WHO)

The World Health Organization (WHO) has announced that the H1N1 swine flu pandemic has entered the “post-pandemic” period. According to the announcement:

“As we enter the post-pandemic period, this does not mean that the H1N1 virus has gone away. Based on experience with past pandemics, we expect the H1N1 virus to take on the behaviour of a seasonal influenza virus and continue to circulate for some years to come.In the post-pandemic period, localized outbreaks of different magnitude may show significant levels of H1N1 transmission. This is the situation we are observing right now in New Zealand, and may see elsewhere.

In fact, the actions of health authorities in New Zealand, and also in India, in terms of vigilance, quick detection and treatment, and recommended vaccination, provide a model of how other countries may need to respond in the immediate post-pandemic period.

Globally, the levels and patterns of H1N1 transmission now being seen differ significantly from what was observed during the pandemic. Out-of-season outbreaks are no longer being reported in either the northern or southern hemisphere. Influenza outbreaks, including those primarily caused by the H1N1 virus, show an intensity similar to that seen during seasonal epidemics.

During the pandemic, the H1N1 virus crowded out other influenza viruses to become the dominant virus. This is no longer the case. Many countries are reporting a mix of influenza viruses, again as is typically seen during seasonal epidemics.”

However, Dr. Henry Niman of the Recombinomics web site, says that the danger is far from over:

“The pandemic H1N1 is a swine virus that has jumped to humans, which has not happened in a sustained manner since 1918. The similarities between the current strain, and 1918 pandemic H1N1 or seasonal H1N1 in circulation decades ago has led to a reduced infection rate among the elderly.However, the H1N1 virus can aggressively target those under 65, the demographic for over 90% of the fatalities. These fatal cases are linked to the ability of the virus to target the lower respiratory tract, which has been linked to receptor binding domain changes such as D225G as well as low reactor alterations at positions 157-159. Recently released 2010 sequence has demonstrated that these genetic changes are on the rise, raising concerns for the emergence of a more virulent H1N1 in the upcoming months or years.”

The emergence of H1N1 swine flu has nothing to do with generational theory, of course, but I continue to recommend that any household should stock up on enough dried foods, water and medicines to be able to surivive a couple of weeks. This preparation could also help in other circumstances, as the 2005 Katrina hurricane showed.

Additional links

An antibiotic resistant “superbug” bacteria has developed in India, and is spreading around the world. In the US, the superbug is likely to appear first in hospitals. NY Times

World commodity grain prices have risen 70% in the last couple of weeks, after the worst drought in 130 years and wildfires forced Russia to ban wheat exports, at least until the end of the year. The result is that we could see street riots over food in underdeveloped countries, particularly in the Middle East, North Africa, and parts of Europe. Reuters

Israel says that it will stop, with bullets if necessary, any future aid flotilla that tries to break the blockade of Gaza. Jerusalem Post

For many parts of Pakistan, especially the south, the worst of the floods is yet to come, as the nation begins the holy month of Ramadan. CNN

Australia is being overrun by rabbits. Reuters

(Comments: For reader comments, questions and discussion, see the 12-Aug-10 News — Wall Street turns pessimistic thread of the Generational Dynamics forum. Comments may be posted anonymously.) (12-Aug-2010) Permanent Link

11-Aug-10 News — US and Vietnam conduct naval exercises in\ South China Sea
Nobody wants to use the U.S. one dollar coin

US / Vietnam naval exercises in South China Sea rattle the Chinese

The giant nuclear-powered aircraft carrier USS George Washington has docked in a Vietnamese port in preparation for week-long naval exercises between the two countries. They will focus on non-combatant operations such as sea rescues, according to VOA.

With the U.S. and Vietnam having been at war in the 1970s, no other exercise like this have ever taken place. What’s motivated them now is China’s increasingly belligerent attitude involving its claim to the entire South China Sea that we reported on several weeks ago. (See “24-Jul-10 News — US confronts China on South China Sea claims.”)

Conflicting claims in the South China Sea.  China claims the entire area bordered by the dotted red line. <font size=-2>(Source: BBC)</font>
Conflicting claims in the South China Sea. China claims the entire area bordered by the dotted red line. (Source: BBC)

As we described in that report, US Secretary of State Hillary Clinton chastised China at an ASEAN meeting for its claims to the islands of the South China Sea, particularly the Paracel Islands and the Spratly Islands. It turns out that the South China Sea issue was on the ASEAN agenda because Vietnam put it there, in order to turn the world spotlight on the issue, and apparently they’ve succeeded.

China has reacted angrily, and several countries in the region are asking for help from the U.S. in countering China’s threats. Among these, the Philippines and Malaysia have laid claim to the Spratlys, and Vietnam has laid claim to the Paracels.

Thus, the United States has been expanding its military relationships with Vietnam, Malaysia and Indonesia, according to Retired US Navy Adm. James A. Lyons, writing for the Washington Times. In particular, Lyons recommends leasing sophisticated military hardware to the Philippines, including a squadron of F-16 fighters and T-30 supersonic trainers.

In response, China has conducted its own military exercises in the South China Sea. And a new article in the Beijing Review details the “Historical and legal evidence [that supposedly] proves China’s indisputable sovereignty over the South China Sea.”

Generational Dynamics predicts that China and the U.S. will be on opposite sides in the coming Clash of Civilizations world war. Whether it will begin in the South China Sea, or on Taiwan, or in Central Asia or elsewhere cannot be predicted, but the end result is certain.

History of Vietnam

Vietnam’s last generational crisis war was the the civil war of the 1960s and 1970s. The war was not fought against the Americans, though the Americans were there, supporting the South Vietnamese. It was fought between the North and the South, and the Americans were irrelevant.

In fact, generational crisis wars between North and South Vietnam have occurred regularly, every 70-90 years, since North and South Vietnam have had different ethnic origins. North Vietnam (Vietnamese Kingdom) was originally populated by ethnic Chinese, while South Vietnam (Champa Kingdom) was populated by Polynesian settlers from Indonesia and Malaysia. These ethnic differences resulted in one crisis war after another over the centuries, whether the Americans were there or not.

Generational crisis wars in 1471 and 1545 finally ended the Champa Kingdom in the south, and also drove out the Chinese Army from the north. However, the country remained partitioned until the Tay-Son rebellion, 1771-1790, the most celebrated military event in Vietnamese history. In its explosive climax in 1789, the Vietnamese troops repelled a much larger Chinese army in a brilliant battle that united the country for the first time.

The generational awakening era that followed the Tay-Son rebellion changed the country enormously. The 1800s were the high point of literary culture in Vietnamese history, and, thanks to the French, Christianity bloomed, with hundreds of thousands of Catholic conversions from Confucianism and Buddhism. That lasted until the next crisis war, the French conquest of Indochina in 1865-1885.

Under the French, the Catholic Church flourished, opening missions, schools and hospitals all over the country.

Vietnam’s next Awakening era featured riots and demonstrations directed at the French colonialists, and the rise of Ho Chi Minh. Ho took part in the founding of the French Communist Party in 1920, and formed the Revolutionary Youth League in Vietnam in 1925. Ho led numerous anti-colonial uprisings in the following decades, and during WW II, Ho formed the Viet Minh political / relief organization, for people starving to death thanks to confiscation of goods by the occupying Japanese.

After WW II, Ho Chi Minh led the effort to drive the French from Vietnam, and succeeded with human wave assaults against a large French encampment at Dien Bien Phu in 1954.

With the French gone, Vietnam was once again partitioned into North and South. Ho controlled the North, with support from the Soviet Union and China, and over half a million Catholics migrated from the North to the South. America feared that South Vietnam would also fall under Communist control.

This was the time when America had fought two world wars, and was desperately fearful of a third one on the horizon, this time with the Communists. It was considered essential to stop Communism before it could become too threatening, and so America endeavored to stop Communism from spreading from North to South Vietnam. America began providing advisors in the 1950s, growing to full-scale armed intervention in the 1960s. The North-South crisis civil war finally ended in 1974, with Hanoi’s victory, followed by Hanoi’s reign of terror.

Today, Vietnam is well into one more generational awakening era. When President Bush visited Vietnam in 2006, the young people of Saigon (they don’t call it Ho Chi Minh city) lined the streets and cheered wildy, expressing admiration for America, and also hostility towards their Hanoi masters.

Today, even Hanoi wants to be friends with America, to counter threats from China in the South China Sea.

And so, the cycle of life takes one more click forward. The Vietnamese don’t give a shit about us, but we’re still policemen of the world, and we will do what we have to do, in the South China Sea and elsewhere.

Additional links

US $1 coin <font size=-2>(Source: BBC)</font>
US $1 coin (Source: BBC)

The U.S. introduced a $1 coin in 2007, but nobody wants to use it, and so there are $1.1 billion of the coins in storage. BBC

Omar Khadr was 15 years old when US forces in Afghanistan captured him and sent him to Guantanamo prison. He may be the youngest person in history ever to be charged with war crimes. Al-Jazeera

President Obama’s press secretary Robert Gibbs has infuriated many of his supporters by calling them the “professional left.” He said that these people “wouldn’t be satisfied if Dennis Kucinich was president.” I wonder why he doesn’t just call them nihilistic Generation-Xers? Politico

Japan’s Prime Minister Naoto Kan apologized Tuesday for Japan’s colonial rule of Korea. The apology comes as the 100th anniversary of Japan’s August 29, 1910, annexation of Korea approaches. The Koreans are pleased with the apology, but say that it doesn’t go far enough because it isn’t accompanied by a promise of monetary compensation. Xinhua

The U.S. is winning friends in Pakistan with helicopters delivering food and water to stranded victims of the torrential floods. AP

Islamist terrorist groups are also winning friends in Pakistan by providing medicine and helping to rebuild homes. Reuters

(Comments: For reader comments, questions and discussion, see the 11-Aug-10 News — US and Vietnam conduct naval exercises in South China Sea thread of the Generational Dynamics forum. Comments may be posted anonymously.) (11-Aug-2010) Permanent Link

10-Aug-10 News — North Korea fires artillery shells into Yellow Sea
A generational analysis of Kashmir

North Korea fires artillery shells into Yellow Sea

Yellow Sea and Sea of Japan -- called East Sea and West Sea, respectively, by Korea. NLL = Northern Limit Line - the line defining North Korea's territorial waters
Yellow Sea and Sea of Japan — called East Sea and West Sea, respectively, by Korea. NLL = Northern Limit Line – the line defining North Korea’s territorial waters

Acting like petulant teenagers on Monday, the North Koreans fired 130 rounds of artillery into the Yellow Sea, according to Yonhap.

Most of the artillery shells landed in the North Korean side of the Northern Limit Line (NLL), the line defining North Korea’s territorial waters. However, some of them splashed into the water south of the NLL.

At America’s State Department press briefing on Monday, assistant secretary Philip J. Crowley said that animal rights activists should be complaining about the fish that were killed:

“QUESTION: On North Korea. The U.S. has been urging the North Koreans to stop further provocation, but today, North Korean military fired more than a hundred rounds of artillery into borders (inaudible) – border of South Korea. So I can I ask a reaction to this particular incident?MR. CROWLEY: I’m sure it resulted in a lot of dead fish and we certainly hope that PETA will protest. It is not a helpful sign by North Korea and this is exactly the kind of behavior we would like to see North Korea avoid.

QUESTION: But just to continue on North Korea. I mean, since they – you passed your UN Security Council resolutions warning against further provocation, I mean, they seem to be doing a host of things. I mean, the shipping boat was just the other day was just one. Then there are continued little small skirmishes that we’ve seen. I mean, is there a concern that there is going to be continued provocation by North Korea, one of which might not just be left to joke about later?

MR. CROWLEY: Again, based on – if past is prologue, are we likely to see more provocations? Regrettably, the answer is we’re likely to see more provocations. All we can continue to communicate to North Korea is that there will be no reward for these provocations. North Korea will continue to be isolated. We’ll continue to work with the international community to fully implement Resolution 1874, and we will continue to find ways as we’ve talked about to put pressure on the North Korean Government to change course. As to what North Korea will do, my crystal ball is not that effective.

QUESTION: P.J., I presume that your initial comments there were a bit tongue – you were trying to be tongue and cheek, yes? I just want to make sure that – you’re not suggesting that the only thing that needs to be protested here is the death of a bunch of fish.


QUESTION: I mean, you want PETA to protest this? Are you willing to protest it as a provocation?

MR. CROWLEY: Well, we have –

QUESTION: With (inaudible) intention to be –

MR. CROWLEY: We have made our views known to North Korea directly and repeatedly. We want to see North Korea cease its provocative actions. We want to see North Korea find a way to work constructively with its neighbors. We want to see North Korea reduce tensions. The fact that they have sunk a North Korean ship[i], we are aware that they have taken a fishing vessel in the high seas. It’s unclear the specific circumstances; South Korea is investigating that incident. But certainly the firing of a very large number of rounds in the region is the last thing that we want to see and is certainly not the best way to reduce tensions.

It’s unclear to us exactly what North Korea feels it is trying to achieve through this ongoing chest thumping that it has engaged in. All we can say is that we will continue to work effectively and closely with South Korea, other countries in the region, and there will be no reward for North Korea, for these provocations.”

As you can see, the questioner was not impressed by Crowley’s little joke about dead fish and the animal rights organization PETA.

However, the entire interchange indicates how directionless the policy towards North Korea is. This is because no direction is possible.

The North Koreans seem to be attempting to provoke a war. The North Koreans are going through a succession crisis, as President Kim Jong-il is old and frail. The North Koreans have a million man army ready to march south into Seoul, and they undoubtedly fantasize uniting North and South Korea until their control.

If the North Koreans are intent on provoking a war, there’s little that the South or the Americans can do about it, except continuing with things like the naval exercises as a show of force, so that the North Koreans will understand that winning a war will not be as easy as their fantasies tell them.

The South Koreas are still furious about the sinking of the Cheonan, killing 46, and they’re undoubtedly also furious that the North seems to have gotten away with it.

Thus, tensions are still great on both sides, and are probably growing. Both sides are pushing the limits of provocation, and if one side or the other takes a step too far, the result would be a major war.

Mia Farrow contradicts Naomi Campbell in war crimes trial

The prosecution of former Liberian president Charles Taylor on charges of aiding the rebels in the Sierra Leone crisis civil war in the 1990s continues to hinge on the question of whether Charles Taylor gave supermodel Naomi Campbell a diamond at a 1997 dinner for Nelson Mandela. For, if he did, it would indicate that it was a “blood diamond” that Taylor had obtained from the rebels for large sums of money and weapons.

Several days ago, we reported that Naomi Campbell testified that she did receive some “dirty pebbles” from two men who knocked on her door in the middle of the night, but she didn’t bother to ask who they were from because “I get gifts all the time: sometimes in the middle of the night without knowing who they are from. It is quite normal for me.”

Mia Farrow in court <font size=-2>(Source: LA Times)</font>
Mia Farrow in court (Source: LA Times)

Actress Mia Farrow had also been at the 1997 Mandela event, and her court testimony on Monday contradicted Campbell. The LA Times quotes Farrow as saying that she spoke to Campbell the next morning and, “She said in the night she had been awakened by men knocking at her door and they had been sent to her by Charles Taylor, and they had given her a huge diamond,” Farrow said, adding that Campbell had been “quite excited” about it.

Naomi Campbell nuzzles Nelson Mandela in 1997 <font size=-2>(Source: Telegraph)</font>
Naomi Campbell nuzzles Nelson Mandela in 1997 (Source: Telegraph)

Meanwhile, the Telegraph has published the above 1997 photo of Naomi Campbell nuzzling Nelson Mandela.

So it remains to be seen how much bearing all this supermodel testimony will have on whether Charles Taylor is convicted. He is charged with 11 counts of instigating murder, rape, mutilation, sexual slavery and conscription of child soldiers during wars in Liberia and Sierra Leone in which more than 250,000 people were killed. He denies all the charges.

Generational analysis of Kashmir

An expert analysis of the situation in Kashmir, published by Eurasia Review, has a generational flavor.

The analysis by Mohammad Ashraf begins as follows:

“In the 63 years of Kashmir’s association with India, there have been many agitations and upheavals. However, the scale, the sentiment, the emotions, and the total involvement of the population seen at present are unprecedented. A strange frenzy seems to have overtaken the entire population, be it the young children, the teenagers, the women, and the elders. They are absolutely fearless of the armed soldiers and are facing bullets with their bare chests. The State Government has ceased to exist for all practical purposes. The Central Government is confused and paralyzed. They have absolutely no idea as to how the fire in Kashmir can be doused. On the contrary, instead of cooling tempers they are adding fuel to the fire by sending more troops. Kashmir is already known as the most militarised area of the world.”

From the point of view of Generational Dynamics, the young people that this paragraph talks about are in the “Hero” archetype, just like America’s World War II GI generation, and just like today’s Millennial generation (Generation Y).

Kids in Hero archetype generations start out as a generation in waiting — waiting for the day when they’ll go without hesitation to save the society and its way of life from the enemy, whoever that may be.

Additional links

Death rates in Moscow have nearly doubled to 700 per day, compared to a normal 380 per day. City morgues are dangerously close to filling up, as the smog from the wildfires is unabated. Moscow News

German authorities have permanently shut down the Taiba Mosque in Hamburg. The September 11 suicide pilot Mohammed Attah had attended the mosque, and had used his contacts there to plot the 9/11 attacks. Deutsche Welle

Torrential rains continued to make the Pakistan floods even worse. The apparent incompetence of the government in handling the emergency has further damaged its stature, and given increased stature to the army. McClatchy

Two Demcratic Congressman are going to hold up $100 million in aid to Lebanon’s army that had previously been approved. The aid was blocked after the recent deadly border clash between Lebanon and Israel. Telegraph

The U.S. is not only conducting naval exercises with the South Koreans, but it’s also doing so with the Vietnamese. A U.S. warship will dock in Vietnam on Tuesday as part of week long naval exercises. The exercises will take place in the South China Sea, and will be sure to anger the Chinese. Bloomberg

(Comments: For reader comments, questions and discussion, see the 10-Aug-10 News — North Korea fires artillery shells into Yellow Sea thread of the Generational Dynamics forum. Comments may be posted anonymously.) (10-Aug-2010) Permanent Link

9-Aug-10 News — N. Korea seizes S. Korean fishing boat
Wildfires in Russia are infuriating the public

North Korea seizes S. Korean fishing boat in retaliation for naval exercises

Yellow Sea and Sea of Japan -- called East Sea and West Sea, respectively, by S. Korea
Yellow Sea and Sea of Japan — called East Sea and West Sea, respectively, by S. Korea

North Korea has seized a 41-ton South Korean fishing boat, the “Daeseung 55.” The boat was in the Sea of Japan near the border between North Korea and Russia, and may (or may not) have accidentally entered North Korean territorial waters.

The South Korean maritime authorities had regular contact with the ship until around 5:30 am on Sunday morning, according to the Korea Times. At that point the signal was lost, and it was confirmed via satellite phone call that the boat was being towed by a North Korean patrol boat to a North Korean port.

The seizure appears to be in retaliation for naval exercises being conducted in the Yellow Sea by South Korea, involving 4,500 men and all four branches of the military. The CS Monitor reports that the South Korean vessels conducted nighttime live-fire antisubmarine exercises in the same general area where a South Korean warship, the Cheonan, was sunk on March 26, killing 46. An international forensic team concluded that a North Korean torpedo had sunk the Cheonan. In the exercises, South Korean vessels, supported by warplanes, began firing on targets in the Yellow Sea at sundown and were expected to keep up the exercises for the next six or seven hours.

North Korea had claimed that the drills amounted to an “undisguised military intrusion.” CNN quotes North Korea’s state-run news agency as saying:

“The army and people of the DPRK [North Korea] are closely watching every move of [South Korean President] Lee Myung-bak’s group of traitors. And if the puppet warmongers dare ignite a war, they will mercilessly destroy the provokers and their stronghold by mobilizing most powerful war tactics and offensive means beyond imagination.”

In case you don’t know, the word “puppet” refers to the claim that the South Koreans are puppets of the United States.

There were seven crew members of the fishing boat, four Koreans and three Chinese. Having the Chinese on board will pose some issues for the North Koreans, because they wouldn’t want to keep hostages from their ally. However, the fate of the four South Korean crew members will certainly be in doubt.

Joint U.S. – South Korean naval exercises took place a couple of weeks, and there are plans for several additional rounds of exercises by the end of the year. All of these exercises are in reaction to the sinking of the Cheonan, but the North Koreans and the Chinese are bitterly opposed to them.

The current exercises by the South Koreans alone are taking place in the Yellow Sea, over the objections of the Chinese. Different news stories seem to make different statements as to whether any of the joint US/S.Korean exercises will take place in the Yellow Sea. Some stories indicate that Yellow Sea exercises will take place in September, while other news stories indicate that the U.S. has decided against Yellow Sea exercises to avoid provoking the Chinese.

Wildfires in Russia infuriate the people

The wildfires in Russia continue to burn.

There are 500 fires burning across Russia, about 50 of them on the outskirts of Moscow. Muscovites are warned to stay indoors because of the heavy smog, and if they do go outdoors, they choke on the smog and can’t see more than a few feet in front of them.

The fires are having an effect on internal politics. Russians are furious at Moscow for being so poorly prepared for this wildfire epidemic, according to Spiegel.

But it goes beyond just feelings of frustration. In 2007, then-president Vladimir Putin dismantled Russia’s forestry service, replacing it with a high-tech system based on satellites. Unfortunately, the new high-tech system is incapable of detecting small files, according to a summary of analyses by Russian experts published by Eurasia Review. One normally doesn’t fire firemen during a fire, but things are so bad that BBC reports that President Dmitry Medvedev is sacking top military officers over Russia’s fire failures.

We’re seeing the same kinds of things in Russia that we’ve seen in America since the Gulf oil disaster and in Pakistan since the floods — A population increasingly furious at the incompetence of the government. With all three countries in generational Crisis eras, we can expect the three populations to become more nationalistic and xenophobic, though it remains to be seen how these behavioral changes will manifest themselves.

Additional links

More than 57 young men, mainly in their teens, were in Indian-controlled Kashmir’s hospitals in the last week, after they’d been fired upon by security forces. Separatist leaders warn that the Indians are creating a new generation of angry teenage militants dedicated to confrontation with the Indian security forces. Telegraph

The same monsoon rains that are flooding Pakistan are also flooding parts of Indian-controlled Kashmir. Thousands of people have been forced to leave their homes to flee to higher ground, and sleep in open air. al-Jazeera

The Juarez drug cartel appears to be losing ground to the Sinaloa drug cartel in Juarez, Mexico. In desperation, the leaders of the Juarez drug cartel are committing acts with the objective of drawing U.S. government forces into the Juarez conflict, in the belief that the U.S. will attack the Sinaloa cartel. However, the U.S. shows no inclination to get involved in Juarez, and the Mexican government would oppose U.S. intervention. Stratfor

Trade between North and South Korea has fallen 30% since the South cut almost all business relations with the North after an international investigation found Pyongyang torpedoed one of its naval ships in late March, the customs office here said yesterday. JoongAng

Women buy sexier clothes on days when they are most fertile. Toronto Sun

(Comments: For reader comments, questions and discussion, see the 9-Aug-10 News — N. Korea seizes S. Korean fishing boat thread of the Generational Dynamics forum. Comments may be posted anonymously.) =eod

(9-Aug-2010) Permanent Link

8-Aug-10 News — Pakistan appeals for international help with floods
Pakistan’s president faces scandal over his absence during floods

Floods continue to spread and devastate Pakistan

Pakistan: Torrential rains worsen floods <font size=-2>(Source: Dawn)</font>
Pakistan: Torrential rains worsen floods (Source: Dawn)

Torrential rains continued to pour down on Pakistan, worsening an already catastrophic situation, according to Dawn.

The Indus river, which runs down the middle of Pakistan from top to bottom, almost for the entire length of the country, has been overflowing its banks, submerging villages for miles on either side. The powerful, gushing streams of water have been breaking dykes, killing thousands of people, and forcing several million to people to flee their homes and seek shelter elsewhere.

Prime Minister Yousuf Raza Gilani has appealed to the international community for help with the floods, according to Dawn.

“Pakistan has been hit by the worst flood in its history. While still struggling to cope with the negative impact of the situation on our western borders and the crisis of internally-displaced persons, we have yet again been hit by a natural disaster,” said Gilani.

“The loss of human lives and infrastructure is colossal. Real assessment of the damage can only be done once the water recedes. I would take this opportunity to appeal to the overseas Pakistanis to extend support to their countrymen in coping with the losses and sufferings. I also urge the corporate sector of Pakistan to come forward and shoulder its social responsibility and generously support the victims of the disastrous flood,” he said.

Growing scandal over President Zardari’s absence

Crowds heckled him and a protestor threw shoes at Pakistan’s President Asif Ali Zardari during a speech in Britain on Saturday, according to the Telegraph. Throwing shoes is a form of insult among Muslims, and the incident was reminiscent of an incident several years ago where an Iraqi journalist threw shoes at President George Bush.

Zardari is in Britain on a visit that was scheduled some time ago. People in Pakistan are wondering why the President of the country didn’t cut his visit short and return to Pakistan to comfort the millions of people victimized by the floods.

Zardari already had low popularity ratings before, and this scandal is pushing them even lower.

(Comments: For reader comments, questions and discussion, see the 8-Aug-10 News — Pakistan appeals for international help with floods thread of the Generational Dynamics forum. Comments may be posted anonymously.) (8-Aug-2010) Permanent Link

7-Aug-10 News — Financial experts freaked on jobs report
Devastating Pakistan floods worsen with new rains

Jobs report reflects continued downward trend in economy

Jobs report for July <font size=-2>(Source: Bloomberg TV)</font>
Jobs report for July (Source: Bloomberg TV)

Friday’s jobs report was much worse than financial experts had expected.

The top graph shows that 131,000 jobs were lost in June. A lot of these were expected, since it was the end of the time when hundreds of thousands of temporary government employees were out interviewing people for the census.

The real focus was on the non-government payrolls, shown in the second graph, and there were two shocks here. First, the growth in private payrolls was 71,000, lower than the 90,000-100,000 that experts had predicted, according to Reuters.

And second, there May and June figures were adjusted downward by 97,000 from where they stood a month ago. That is, 97,000 fewer jobs had been created in May and June than had previously been reported.

The reason that all this is shocking is because the trend is in the wrong direction. The Pollyannaish theories all depend on jobs creation to be surging. If job creation falls at all, especially by these large numbers, it freaks the experts out.

A number of pundits on TV on Friday mentioned temp hiring, and this was another disconcerting figure. As shown on the bottom graph, which shows temp hiring by the private sector (hence does not include the temporary census workers), shows that temp hiring fell by 6000.

The reason that this is important is because the Pollyannaish theories all assume that temp hiring will increase for a while, as businesses “test the waters” in the growing economy, and that these temp workers will be converted to permanent workers when the economic growth seems solid. Thus, the earlier rises in temp hiring were considered to be good news. The fall in temp hiring in July might have been considered good news if it had been accompanied by growth in permanent employment. But since permanent job growth was so anemic, it simply meant that businesses were hiring a lot less than expected, and were not confident about the future.

It’s time, once again, for me to quote this passage from John Kenneth Galbraith’s 1954 book The Great Crash – 1929, as I have several times in the past:

“A common feature of all these earlier troubles [previous panics] was that having happened they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.”

This is exactly what’s happening again. All the experts on TV say things like, “In every postwar recession, yada, yada, yada.” The problem is that this isn’t like any postwar recession. The only comparable “recession” is the one that occurred after the 1929 crash.

In every postwar recession, jobs came back quickly. In this recession, jobs are coming back slowly, if at all.

But this also explains why Generational Dynamics works. Nobody remembers the 1930s depression any more, and so they consider it to be something from the age of dinosaurs that can’t even exist any more.

An analogy for the Law of Mean Reversion

A couple of days ago I tried to explain why the Law of Mean Reversion works. (See “Updating the ‘real value’ of the stock market.”)

S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010
S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010

The problem is to explain why, if the S&P 500 price/earnings ratio has been way above the historical average since 1995, then it has to be way below average for a similar time into the future — i.e., until 2025.

The explanation I’m looking for is to compare the huge debt bubble of the last few years with a poison that affects every part of the economy. The poison is the debt that people and businesses take on during the bubble, and then it takes them many, many years to pay off the debt.

I asked an online correspondent if he could think of a kind of human poisoning that works something like that. He suggested lead poisoning. If you’re exposed to lead, then it builds up in your body tissues. Once the problem has been identified, it’s necessary to take various medicines for a while to get rid of the lead.

But then I heard a woman on TV say the following: “I always say it too me nine months to have a baby and two years to lose the weight.”

Now there’s a great analogy. If you’re a woman and you get pregnant, then you can (hopefully) enjoy the pregnancy for nine months. But once the little bundle of joy has been delivered, then it may take you years to lose the weight that you gained.

So there you have two different analogies you can think of, to help you understand why the Law of Mean Reversion works, and why it’s a mathematical certainty that the stock market is going to have to fall very far, and stay down there for many years.

Increasing debt of US companies

Part of the Pollyannaish view that the economy is improving is the assumption that the 2007 financial crisis is over and all the debt has been removed from company books. However, the poison analogy that I described above says otherwise — that it will take a long time to remove the poison of debt from businesses.

Here’s how Brett Arends, a columnist on Market Watch, described what’s going on:

“You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they’ve paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.You could hear this great news pretty much anywhere — maybe from Bloomberg, which this spring hailed the “surprising strength” of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies “have accumulated an astonishing $1.8 trillion of cash,” leaving them in the best shape, by some measures, “in almost half a century.”

Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were “hoarding cash” but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?

It all sounds wonderful for investors and the U.S. economy. There’s just one problem: It’s a crock.”

The problem is that US companies have not been DECREASING their debt levels; they’ve been INCREASING them since the 2007 credit crunch:

Ratio of debt to net work for US corporations <font size=-2>(Source: Market Watch)</font>
Ratio of debt to net work for US corporations (Source: Market Watch)

Arends calls this situation the “biggest lie about US companies.” The Pollyannaish “experts” on tv tell you that the companies have tons of cash sitting on the sidelines, waiting to move into the market, and cause the stock market bubble to grow again.

What this graph shows is that it’s completely untrue. US companies must be in a great deal of trouble, because they keep going deeper and deeper into debt. This is just like a consumer who’s buried in credit card debt, borrowing more money on another credit card to make payments on the other debt. Sooner or later it all collapses — for the consumers and the businesses.

This goes back to the poison analogy that I’ve been describing. The poison of debt has built up in the body tissues of the entire economy, and it will take many, many years for the poison of debt to be removed.

From the point of view of Generational Dynamics, the financial crisis that started in 2007 has barely begun, and we’re headed for a truly major financial crisis of historic proportions. This is an absolute certainty.

Additional links

The devastating floods in Pakistan, already the worst in 80 years, are growing worse, as more heavy rain is expected in the next two days, causing hundreds of thousands more people to leave their homes. As the floods spread, power plants are being threatened. Dawn

As the floods continue to spread in Pakistan into the country’s agricultural breadbasket, aid is pouring in from the United States. At the same time, militant Islamist groups are providing volunteers around the country, and are operating medical camps. CS Monitor

Fires continue to spread in Russia and choke Moscow, resulting in intense anger at the government for allowing it to happen. Global Post

A Japanese tanker carrying 270,000 tonnes of oil through the Strait of Hormuz suffered an explosion on July 28, but then made it to port. The UAE Coast Guard has now confirmed that the explosion was a terror attack on the vessel, inflicted by a boat loaded with explosives. An al-Qaeda linked group called the Abdullah Azzam Brigades has claimed responsibility. The National (UAE)

In Indonesia, which has the world’s largest number of Muslims, there are 1.2 million of the faithful now on a government waiting list to make the trip to Mecca. These people are required to deposit money with the government to get onto the waiting list, but now it turns out that government officials and politicians have been misusing the money to fatten their own pockets. NY Times

The Chinese government is concerned because young people in China are increasingly unable to write in Chinese characters, because of computers. When typing on a computer, a Chinese can type out the beginning of the word in pinyin, the Romanized version of Mandarin, and the computer software will translate the pinyin into the appropriate Chinese character. Asia Times

Coming soon is the 100th anniversary of Japan’s August 29, 1910, annexation of Korea, which the Japanese occupied until World War II ended in 1945. Recent polls show that Koreans are still bitter about the brutal treatment of the Koreans by the Japanese. Asia Times

Anti-nuclear activists in Pakistan are questioning the help that Pakistan is getting from China in constructing nuclear reactors, claiming that they only make Pakistan more vulnerable. Memri

The 42 year old Julia Roberts has disclosed that she is a practicing Hindu. She goes with her husband to temple to “chant and pray and celebrate.” Telegraph

(Comments: For reader comments, questions and discussion, see the 7-Aug-10 News — Financial experts freaked on jobs report thread of the Generational Dynamics forum. Comments may be posted anonymously.) (7-Aug-2010) Permanent Link

6-Aug-10 News — Wheat prices climb after Russia announces export ban
Many Americans in the UK are renouncing US citizenship

Wheat prices climb as Russian wild fires become a national disaster

Wheat prices on the Chicago board of Trade rose the maximum amount permitted in a single day on Thursday to $7.85 per bushel, according to Reuters. Prices have risen 82% since June 9, when a bushel of wheat was priced at $4.25.

Thursday’s price surge was sparked by Russia’s decision to freeze all wheat exports at least until the end of the year. In addition, Moscow has requested that former Soviet states Kazakhstan and Belarus also freeze their wheat exports, according to Ria Novosti. Russia is the world’s third largest exporter of wheat.

These decisions were made as Russia is suffering the worst heat wave and drought since records began 130 years go. The result of the drought is that the 2010 grain forecast has been cut to 70 million tons from 90 million tons.

A grain field burns in Russia <font size=-2>(Source: Moscow Times)</font>
A grain field burns in Russia (Source: Moscow Times)

The drought has destroyed one-fifth of Russia’s wheat crop, and now wildfires are finishing off some of the fields that remained.

Moscow is engulfed in smog, thanks to hundreds of wild fires that are out of control, burning villages to the ground. Like the floods in Pakistan that we described yesterday, Russia’s fires are achieving geopolitical significance, as can be seen from the freezing of exports.

In 2008, wheat prices rose to $13 per bushel, causing enormous hardship in poor regions. Wheat prices are lower than that amount today, but they’re still rising.

The juiciest story of the day — Naomi Campbell testifies

Naomi Campbell in court <font size=-2>(Source: Telegraph)</font>
Naomi Campbell in court (Source: Telegraph)

The juiciest international news on Thursday is that supermodel Naomi Campbell testified at the war crimes trial of former president of Liberia Charles Taylor, who is accused of supporting the Sierra Leone crisis civil war in the late 1990s, despite the fact that Taylor wasn’t even in Sierra Leone. He’s accused of purchasing “blood diamonds” from the Sierra Leone rebel force, who had perpetrated widespread atrocities, in order to give them money to buy weapons.

Naomi Campbell was subpoenaed to testify because she had attended a dinner for Nelson Mandela at which Taylor was present. According to the charges, she flirted and exchanged phone numbers with Taylor, who reciprocated by having two men knock on her door in the middle of the night and give her a pouch of “dirty diamonds” (meaning that the diamonds were covered with actual dirt, as if they had just come out of a mine).

Campbell denied that she had flirted with Taylor, and she stated further that she hadn’t known that the diamonds were from Taylor, until another guest, Mia Farrow, told her that they might be from him.

According to her testimony, quoted by the Independent, she has never heard of Liberia, and: “It is not abnormal for me to get gifts,” she told the court. When she was asked why she didn’t the two men where the diamonds came from, she said, “I get gifts all the time: sometimes in the middle of the night without knowing who they are from. It is quite normal for me.”

This drama hasn’t ended, since Mia Farrow will be testifying next week, and she’s expected to contradict Campbell’s testimony, according to the Independent.

From the point of view of Generational Dynamics, the Sierra Leone civil war was obviously a generational crisis war of the most genocidal kind, and it’s highly doubtful that Charles Taylor could have had any substantial influence on the progress of the war. A generational crisis war, especially one this vicious, is a force of nature, and politicians have little or any control over it.

Additional links

Many Americans living in the UK are turning in their passports and renouncing US citizenship, in order to avoid paying US taxes. Financial Times (Access)

Here’s an oddball story. Apparently, financial firms using programmed (computerized) trading programs are sending thousands of orders a second through electronic stock exchanges, with no intent to actually complete trades. The orders have no apparent purpose. Speaking as a software developer myself, I would guess that they’re test patterns being used to stress test computers programs, in preparation for the day when they have to get orders through during a panic or crash. Atlantic

The Library of Congress is setting up a national organization for the preservation of digital objects, the National Digital Stewardship Alliance. Fierce Government IT

Iran claims to have tricked Russia by obtaining Russian-made long-range S-300 surface-to-air missiles from Belarus and other sources, after Russia had indefinitely delayed filling a 2007 contract for them. The U.S. had objected to the contract because of the missiles’ long-range capabilities. Associated Press

Many Arabs supported Adolf Hitler during WW II, since at that time they were living under British or French occupation. A Saudi columnist is condemning the sympathy that Arabs feel today for Hitler. Memri

Yesterday we reported an item that Iran’s president Mahmoud Ahmadinejad was denying an early report that an assassination attempt had been made on him, using an explosive device that was hurled at him. It now appears that an assassination attempt did take place, and at the same time, a huge explosion occurred at a large petrochemicals complex, destroying large sections of the complex. Iran is playing down the simultaneous attacks. Debka

More than a million BlackBerry users in Saudi Arabia will lose messaging services on Saturday, when the Saudis cut off the service. The Saudis have demanded that Research in Motion, the BlackBerry vendor, give them the codes so that they can monitor encrypted messages. The UAE has already announced a similar ban to begin October 11. The question that’s going through my mind is this: Does all this mean that users of iPhone and other hand-held devices DO have their messages monitored? The National (UAE)

In an interview with Palestinian Authority president Maymoud Abbas, he revealed that a recent Arab summit discussed plans for war with Israel. Memri

China’s government is taking step to stop people from speaking in the Cantonese dialog of Mandarin, the Chinese language. There are some 50 million Cantonese speakers. Asia Times

In Greece, the rate of suicides has doubled or tripled in the last year, as one of the effects of the financial crisis. Kathimerini

Drug cartels are so powerful in Mexco’s Nuevo Laredo that they completely control al the news coverage. Washington Post

A very interesting history of U.S. – Mexican relations, dating back before the Mexican-American war, and how they influence today’s immigration issues. Stratfor

Japan is commemorating the 65th anniversary of the nuclear bombing of Hiroshima that brought about the end of World War II. VOA

(Comments: For reader comments, questions and discussion, see the 6-Aug-10 News — Wheat prices climb after Russia announces export ban thread of the Generational Dynamics forum. Comments may be posted anonymously.) (6-Aug-2010) Permanent Link

5-Aug-10 News — Multiple crises overwhelm Pakistan
In Turkey, a confrontation between the government and the army is building

Anti-Taliban hero killed by suicide bomber in Peshawar, Pakistan

Sifwat Ghayoor, the police chief who has been leading the jawans (troops) fighting the Taliban terrorists, was killed by a suicide bomber on Wednesday, along with three bodyguards, according to Dawn. The attack took place in Peshawar, in Pakistan’s Khyber Pakhtoonkhwa province. This is the new name of the former North-West Frontier Province.

Ghayoor was a hero, according to the Daily Times. The article quotes him as saying, “An officer has to lead from the front,” when asked to protect himself more. If I do not go to spots (after terrorist attacks) my jawans will get demoralised and this is precisely what I don’t want to happen.” According to the article, “Such brave men are far and few between. He is no longer with his family, friends and well-wishers. But he will live in everyone’s hearts and minds as long as Pakistanis continue to sacrifice their lives for their country.”

Millions of people in Pakistan displaced by floods

I’ve only briefly mentioned the floods in Pakistan before now, but now it’s becoming increasingly apparent that they’ll have geopolitical importance, as illustrated by the above suicide attack.

Entire villages were flattened and washed away by the Pakistan floods <font size=-2>(Source: BBC)</font>
Entire villages were flattened and washed away by the Pakistan floods (Source: BBC)

This is the worst flood that Pakistan has seen since 1929 (before the country even existed as a country). Hundreds of villages have been flattened and washed away, according to the BBC.

Almost the entire Indus River valley has been flooded, destroying most bridges <font size=-2>(Source: BBC)</font>
Almost the entire Indus River valley has been flooded, destroying most bridges (Source: BBC)

America’s Katrina floods in 2005 affected New Orleans and surrounding areas, but this flood has literally affected most of Pakistan. As you can see from the above map, the flooding has wiped out villages from the top of Pakistan to the bottom, along the Indus River. Millions of people have lost their homes. The rain is continuing, and is not expected to let up until the weekend.

“All the major roads, bridges have been destroyed and so are the police stations, administration buildings, telephone exchange. Thousands of houses have been razed to the ground by the storm and at least one million people have been homeless,” according to an official quoted by the Hindustani Times.

The result is an opportunity for militants. One official is quoted as saying, “Militant commander Mullah Fazlullah [leader of TTP = Tehreek-e Taliban Pakistan, or Pakistani Taliban] has announced a Taliban rebound plan in the Swat valley through a video message and now the whole area is inundated with storms, limiting the movement of the military and wiping out all the infrastructure.”

Opportunities for the Taliban

Fazlullah’s announcement shows indicates that the Taliban expect to take full advantage of the situation, while Pakistan’s army is overwhelmed, attempting to save lives and provide shelter, food and clothing for the survivors.

According to an analysis in the Asia Times, all operations by the army against militants have been put on hold, giving the Taliban and other terrorist groups much more freedom. Furthermore the with all main bridges collapsed in some regions, the situation could be affected for a year.

The floods have also severely affected the flow of supplies to Nato forces in Afghanistan. Normally, these supplies arrive in port in Karachi, and travel by truck through the Khyber Pass in the tribal areas to Afghanistan, but many of these roads are closed now.

Violence continues in Karachi, with an al-Qaeda connection

We’ve been reporting on the violence in Karachi, and it continued on Wednesday when unidentified attackers hurled a grenade at a Karachi mosque during evening prayers, according to Reuters.

The original violence was triggered by the assassination of Raza Haider, a Shia Muslim and leader of the MQM political party. According to the Daily Times, The Karachi Police are investigating the role of TTP (Tehreek-e Taliban Pakistan, or Pakistani Taliban) in the assassination. According to the article, the assassination was masterminded by an anti-Shia terror group affiliated with TTP, who are Sunnis and ethnically Pashtun.

There is an interesting historical analysis of the city of Karachi in the Asia Times. According to the article, Karachi was largely a business-oriented city, a cosmopolitan home to many ethnic groups.

The first faultline emerged after the Soviet Union’s invasion of Afghanistan in 1979, according to the article. Karachi became one of the biggest refugee camps for Afghans fleeing the war. This provided a big boost for religious organizations and in 1983 the first large-scale Shia-Sunni riots broke out. This also occurred near the end of a generational Awakening era, a typical time for this kind of riot to occur, but then to fizzle quickly.

9/11 changed the allegiances of some of the groups that had originally favored the U.S. According to the article, all jihadi organizations and Pashtuns are in one camp. They are lined up against the MQM, the Sunni Tehrik (an anti-Taliban Sunni group), and all Shia groups. It’s a highly explosive situation.

According to the article, al-Qaeda’s strategy in Pakistan all along is to set up “war centers” all across Pakistan, in order to force the army to spread itself too thin. Thus, I would assume that al-Qaeda leaders are thanking Allah tonight for the massive floods, as they allow al-Qaeda and the Taliban to pursue their strategy.

Additional links

In Turkey, a confrontation is building between the pro-Islam government of president Prime Minister Recep Tayyip Erdogan and Turkey’s secular army, which is accused of a coup plot, polarizing the country. Eurasia Net

The danger in withdrawing US troops from Iraq was never a civil war, as many pundits claimed, but influence and/or invasions from neighboring countries — Turkey, Syria, Iran, Saudi Arabia, Kuwait. Already, the 5-month-old effort to form a new government in Iraq has become snarled in the battle for influence, with rival nations lining up behind the factions and political leaders shuttling among neighboring capitals for talks with their patrons. LA Times

There were reports on Wednesday morning that Iran’s president Mahmoud Ahmadinejad had been the target of an assassination attack by a homemade explosive device, but officials later denied this and said that the sound was a firecracker welcoming Ahmadinejad. NY Times

(Comments: For reader comments, questions and discussion, see the 5-Aug-10 News — Multiple crises overwhelm Pakistan thread of the Generational Dynamics forum. Comments may be posted anonymously.) (5-Aug-2010) Permanent Link

4-Aug-10 News — Kashmir violence spirals upward
China’s real estate bubble appears to be bursting

Kashmir violence may be spiraling out of control

Five more people were killed on Monday, when government forces fired on protestors, totalling 43 deaths since June 11, according to the Kashmir Observer. A government-ordered curfew is being ignored, as thousands of protestors are filling the streets, according to the article.

The violence appears to be spiraling out of control, with even Kashmiri separatist leaders appealing for calm, according to Reuters.

Kashmir is at the heart of the disagreements between Pakistan and India, and the site of the bloodiest part of the war between Muslims and Hindus that followed Partition, the 1947 partitioning of the Indian subcontinent into India and Pakistan. Generational Dynamics predicts that this war will be re-fought soon.

Past uprisings in Kashmir have appeared to be spiraling out of control, but they settled down after a few days. However, as India and Kashmir go deeper into a generational Crisis era, it becomes increasingly likely that an uncontrolled riot will spread to a larger war.

Rioting kills dozens in Karachi, Pakistan

The number of those killed in rioting in Karachi, Pakistan, and Sindh province rose to 53 on Tuesday, as gunmen have carried out numerous attacks, according to The Hindu. The attacks were triggered by the murder of Raza Haider, a leader of the MQM political party.

As far as I can tell, this violence is politically based, rather than ethnically based. In fact, an acquaintance of mine who was born in Karachi tells me that it’s the “Karachi Mafia” that’s doing all the killing.

If that’s true, then the current violence in Karachi is most similar to the Chicago gang wars of the 1930s, led by Al Capone.

Five people killed in clash on Israel – Lebanon border

Five people were killed in a firefight on the border between Lebanon and Israel, according to the BBC.

This was the worst violence since the 2006 war between Israel and Hizbollah. However, Tuesday’s firefight appeared to be a brief skirmish between the Lebanese army and the Israeli army, and is not expect to spiral into anything more serious.

China’s real estate bubble may be bursting

Megalomania is in full swing in China’s booming economy, according to an analysis of China’s real estate bubble in Spiegel.

A property fair in Jinan, China <font size=-2>(Source: Spiegel)</font>
A property fair in Jinan, China (Source: Spiegel)

A month ago, we quoted Kenneth Rogoff as predicting that China’s property market was collapsing. (See “7-Jul-10 News — Rogoff: China’s property market near ‘collapse.'”

Since then, real estate prices in 70 large Chinese cities declined over the previous month for the first time in 1.5 years, according to the Spiegel article. Xu Shaoshi, China’s minister of land and resources, is quoted as saying that the real estate market could undergo a “total correction” in the third quarter.

At the same time, Reuters reports that there is widespread discontent over property seizures by Chinese Communist Party (CCP) élite, who then use the land to build large real estate complexes with borrowed money. China has a record of tens of thousands of “mass incidents” every year, and the practice of land seizures is one of the leading causes.

I’ve often said that, as bad as the American economy is, China’s is even worse. China has a long history of massive rebellions against the political élite, the last one being Mao Zedong’s Communist revolution that ran from 1934-1949. From the point of view of Generational Dynamics, a new one will be coming soon.

NASA’s Spirit Rover on Mars seems to be gone forever

Nasa’s Spirit Rover has been roaming the surface of Mars since January 2004. However, this past winter, Spirit’s wheel got stuck in a hole from which it could not free itself, and so Spirit could not travel to a place where it could get maximum sunlight. Apparently, Rover is gone for good, according to Discover Magazine.

However, Nasa is inappropriately showing little sensitivity to poor the lost Spirit Rover, according to Physics Central. Nasa is already moving on to the next project and the next rover.

To stir up a little sympathy, the article references an xkcd comic strip that captures the moment:

The end for Spirit Rover <font size=-2>(Source: xkcd)</font>
The end for Spirit Rover (Source: xkcd)

Desktop speech recognition software becoming more accurate

A significant challenge for the development of super-intelligent computers is speech recognition — giving the computer the ability to listen to a speaker and translate the voice sounds into the corresponding text. (See “29-Jun-10 News — Speech recognition brings Singularity closer.”)

A new version of Dragon NaturallySpeaking for Windows from Nuance Communications Inc. offers exceptionally high accuracy, according to a review by David Pogue in the NY Times

Once in a previous life I served as Technology Editor for CFO Magazine, and I had occasion to review a number of speech recognition programs. They all claimed to have something like 98% accuracy. That sounds pretty good until you realize that it means that it gets a word wrong every two or three lines, which ends up being quite annoying.

So I was interested to read that Pogue was able to dictate a 1,300 word column, and the software achieved 100% accuracy.

As I’ve said many times, the reason that artificial intelligence (AI) technology keeps improving is not because the algorithms are improving (although Pogue says that Dragon’s algorithms have some improvements), but because computers are getting more and more powerful. When you utter a phrase like “the book,” the software compares your voice against a large library of sounds. The more powerful the computer, the more comparisons it can make quickly. By 2020, desktop computers or their descendants should have no difficulty at all understanding spoken sentences in English or any other language.

Thousands of cameras watch streets in northwest China

A year ago, ethnic fighting between Han Chinese and Muslim Uighur populations ended up killing at least 197 people in the city of Urumqi in Xinjang province.

Now, there are 47,000 cameras scanning streets and intersections in Urumqi, and by the end of the year there will be 60,000. Experts are predicting that China will have 15 million surveillance cameras by 2014, according to the NY Times

These camera systems use technologies that border on artificial intelligence. Video software can read license plates, and cameras can take pictures of people inside autos. Facial recognition software is being used increasingly.

Additional links

What will happen to human beings when the Singularity occurs and computers do all the work, leaving human beings nothing to do? Web site reader Nigel Strange has written a short story exploring what happens when a planet is composed of entirely of over-educated unemployed migrant slaves. Plastic Children

PKK militants bombed a train in East Turkey. Although the train was carrying cargo and passengers, there were no casualties. Press TV

Escalating hostilities between Turkish forces and PKK Kurds are threatening US policy in Iraq, which calls for a unified government when U.S. troops withdraw from Iraq. World Politics Review

A year ago, Iranian soldiers arrested three American hikers in Iraq near the Iran border, and accused them of espionage. Why are they still holding them hostage? Because Iran has a history of using hostages to make political statements. Duh. CS Monitor

In a sharp reversal of an earlier decision, Israel has agreed to cooperate with the United Nations probe of the Gaza flotilla incident that killed nine Turkish citizens. Israel hopes to improve relations with Turkey again. Jewish Telegraphic Agency

To stop the proliferation of nuclear weapons in North Korea, the U.S. is planning to choke off the international network of companies and banks that largely fund its nuclear weapons program and the lifestyles of its elite. Washington Post

Speaking in France, Pakistani President Asif Ali Zardari says that the war against Taliban is “being lost.” BBC

Prime Minister Vladimir Putin is positioning himself to reclaim the presidency of Russia in 2012. LA Times

(Comments: For reader comments, questions and discussion, see the 4-Aug-10 News — Kashmir violence spirals upward thread of the Generational Dynamics forum. Comments may be posted anonymously.) (4-Aug-2010) Permanent Link

Updating the ‘real value’ of the stock market
Why we’re headed for a financial crash.

The stock market reached its historic high in October, 2007, but two months earlier, in August, I wrote “How to compute the ‘real value’ of the stock market.” This and other articles I had written resulted in a fair amount of derision directed at me, since at that time the financial experts and politicians were predicting that, except for an occasional minor bump in the road, the stock market would keep going up forever.

By the end of 2007, I was hearing far less derision, and as the stock market slumped in 2008, I actually heard some occasional grudging praise.

Then the rally occurred in 2009, and since then some level of derision has recurred.

In this article, I’m going to update the diagrams, and outline the reasons why we’re still headed for a stock market crash.

Price/earnings ratios and the Law of Mean Reversion

Most investors today are no different from drunken gamblers at roulette tables in Las Vegas. When they aren’t playing, they’re desperate and depressed. When they make money, they experience a burst of endorphins that keep keeps them happy for hours. When they lose money, they obsessively double their bets. Brokers have the best of all worlds, since they get to do all of that with other people’s money, and then collect fat commissions.

For those investors who wish to make stock purchases based on real value, there’s only one reliable measure: past earnings. And you can obtain a measure of the value of a share of stock by means of the price/earnings (P/E) ratios (also called “valuations”) — divide the current stock price by total earnings in the last year.

The average P/E ratio for the S&P 500 stocks between 1871 to 1995 was 13.91. This means that if you purchased an average share of stock a year ago, then the company would have earned 1/13.91 = 7.2% of the share price.

Here’s a graph of the price/earnings ratio from 1871 to the present:

S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010
S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010

As you can see from this graph, the P/E ratio has really skyrocketed since 1995, much higher than its historical average at several points, and ALWAYS higher than its historical average since 1995.

Now, the Law of Mean Reversion says that the average (mean) since 1995 also has to equal roughly 13.91, and if it doesn’t, then the average will eventually revert to its historic average. In order to do that, the P/E ratio must go BELOW 13.91 for roughly the same amount and period of time as it was ABOVE 13.91 — i.e., for 15 years.

This means that the P/E ratio must fall well below ten, and stay there for years. There are people who say “this time it’s different,” but the burden of proof is on them to explain why it’s different.

One fantasy argument that these people use is that we’re using “old data” that applied to the doddering old fools who lived years ago and didn’t even have iPhones. Well, when the 1929 crash occurred, those doddering old fools were young, and were giving similar reasons why “this time it’s different.”

In fact, as you can see from the graph, the P/E ratio was as low as 6.79 very recently — in 1980. If it can fall to 6.79 in 1980, then it can certainly do so again today, and anyone who thinks otherwise is a fool.

Claiming “this time it’s different” is a fantasy. Just one look at that graph will tell you that we’re headed for the biggest crash in history, much larger than the 1930s crash. This is a mathematical certainty.

When will this crash occur? It’s impossible to predict, of course, but here’s one way to look at it:

Notice that the three points that I labeled as lows (5.31, 5.82 and 6.79) occurred at 31-year intervals. (But there’s nothing like that in 1887, so this may be completely wrong.) So we have to consider the possibility that there’s some kind of as-yet not understood 31-year cycle in price-earnings ratios. With only three data points, it’s hard to be anywhere near certain. However, if the 31-year cycle holds, then the next low will be in 2011.

Why the Law of Mean Reversion works

The average financial “expert” doesn’t consider any historical data relevant. Something that I hear all the time on CNBC or Bloomberg TV is that a stock is “oversold, because its price is lower than the 200 day moving average.” In other words, to these “experts,” nothing that occurred more than 200 days ago is even relevant to the stock price.

The very high values of the P/E index since 1995 indicate that we’ve been in a huge bubble. A bubble does permanent harm to an economy, and that harm lasts much longer than 200 days. In fact, a bubble can be compared to a poison that harms every nook and cranny of the economy for a long time.

Let’s take the obvious example of the real estate bubble. When that crashed, it obviously affected things a lot longer than 200 days. In fact, the effects today are far from over. The overall foreclosure rate is still increasing. The shadow inventory is so large that even mainstream forecasters are saying that prices will be falling for years. That’s an obvious example of how a bubble has longer effects than 200 days.

Another obvious example is the level of personal debt. During a bubble, there’s plenty of money available in the form of debt, and so people go deeply into debt, expecting that there’ll be more money (credit) in the future to pay off the old debt. At some point, when the credit bubble crashes, and there’s no more debt money available, people have to start paying off their debts, and that can take years.

The same kind of thing is true for every business. Businesses borrow a great deal of money during a bubble, and use the money to hire new employees. When they can’t borrow anymore, they lay employees off, and don’t hire any more. This creates joblessness that lasts for years.

There’s another aspect that applies to business. During a bubble, the world looks different than it does after the bubble bursts. In the bubble world, no expense is spared for glamour, with the result that businesses spend their resources on developing the labor and infrastructure to develop and manufacture products that only interest consumers during the bubble. Once the bubble ends, these businesses turn out to have the wrong kinds of employees with the wrong kinds of skills and the wrong kinds of infrastructure. Years are required for the business to figure out what the correct products should be, and to hire employees with the right skills. In the meantime, many of them go out of business.

Every person and business in the country is affected by the bubble. When the bubble ends, it takes many years to pay off debts and restructure businesses. During this time, the P/E average is much lower than it would have been if there had been no bubble.

The auto industry is an obvious example of this. During the bubble, people traded in their cars for new models more often than necessary, and they chose their new cars for prestige value. Large SUVs were the norm. Once the bubble burst, the market shifted away from SUVs, and people held on to their cars much longer, resulting in significant problems for the industry.

The poison that filled every corner of the economy, starting in 1995, was debt. Debt filled the business economy, debt filled the consumer economy, and debt filled the government economy — in America, in Europe, in China, and elsewhere. The poison created consumer products, created jobs, and created a risk-seeking population. It takes as many years to remove the poison as it did to create it.

One obvious sign of this is that trillions of dollars of “toxic assets” are still in financial portfolios around the world at nominal value — without having been “marked to market.” This “deleveraging” process has already taken several years and has hardly begun. It will take much longer than 200 days. (Paragraphs added – 4-Aug)

That’s why the Law of Mean Reversion works. Don’t blame me. I didn’t make up the Law of Mean Reversion. I’m only telling you what it says.

Attempts to cheat on the price/earnings ratio

When the Great Depression survivors (GI and Silent generations) were running things, they were very risk-averse and very careful with their investments. The P/E ratio was one of their main tools.

When the Silents finally retired in the 1990s, and the Boomers took over in senior management positions, the dot-com bubble began in 1995 (as well as the global real estate bubble).

Since the price/earnings ratios were suddenly out of whack, financial “experts” came up with several alternative ways to compute the P/E ratio to justify the bubble prices:

  • A common trick is to compute the P/E ratio using bloated earnings estimates for the following year (called “forward earnings”). By using bloated earnings values, the P/E ratio is lower. History has shown that earnings estimates by analysts are overstated to the point of absurdity. (See “25-Jun-10 News — The incompetence of financial analysts.”)
  • In the late 1990s, someone thought up the “Rule of 20,” in order to justify purchasing overpriced stocks during the dot-com bubble. (See “26-Jul-10 News — The Rule of 20.”)
  • One commonly used stunt is to use “operating earnings” rather than “real earnings.” Operating earnings are computed by taking real earnings and adding back in any “one-time losses.” In this fantasy, practically anything can count as a one-time loss. In fact, the Wall Street Journal was using operating earnings without even telling anyone, until this and other web sites embarassed them into using real earnings. (See “Wall Street Journal sharply revises its fantasy price/earnings computations.”

At this point, you rarely even hear about P/E earnings or valuations used much, or if there’s a financial “expert” on tv who refers to valuations, he pulls a number (like 10) out of the air, and announces that stocks are underpriced. It’s absolutely incredible.

The ‘real value’ of the stock market.

In 2002, I was eating lunch at the mall reading the Boston Globe, when I saw a graph of the Dow Industrials going back to the early 1900s. I took one look at it and said, “Ohmigod, the stock market is going to crash.” It was that obvious, just from the graph.

The graph must have looked something like the following:

Dow Jones Industrial Average -- 1900 - present
Dow Jones Industrial Average — 1900 – present

Since I was familiar with exponential curves and growth forecasting, I could see immediately that the DJIA had been growing sharply faster than exponential growth since about 1995, and that meant that we had to have a crash.

Let me start by pointing out a big mistake that I see all the time on the internet. Some people, looking at the above graph, would say that the DJIA was pretty much linear at the beginning, and only began exponential growth around 1960 or 1980. I see this kind of claim with regard to long-range population charts or other charts, all over the internet.

In fact, the curve is exponential from the beginning. The only reason that it isn’t evident is because the values at the beginning are too small.

One way to see it is to add a “best fit” historical exponential curve. The blue line in the next graph is a best fit exponential curve from 1904-1994 (I’ve experimented with other year ranges, and it doesn’t affect the final conclusion):

Dow Jones Industrial Average -- 1900 - present - with exponential growth trend curve
Dow Jones Industrial Average — 1900 – present – with exponential growth trend curve

What this graph shows is that the long-term trend value of the DJIA at the present time is around 6049, and that’s the value that could currently be called the “real value of the stock market.” By the Law of Mean Reversion, the index will fall far below that amount to compensate for the period since 1995 when it war far above value. Because of the length of time that the DJIA has been above average, my expectation is that it will fall well below 3000 before everything is over.

To make it clearer that the early part of the graph is not linear, let’s restrict the above graph to the years 1900-1950:

Dow Jones Industrial Average -- 1900 - 1950 - with exponential growth trend curve
Dow Jones Industrial Average — 1900 – 1950 – with exponential growth trend curve

What happened in those years was that the bubble of the 1920s crashed in 1929, and the DJIA was below the long-term trend line for a long time, only catching up around 1960.

The best way to display a long-range exponential growth curve, including a population curve, is on graph with a logarithmic Y-axis, as follows:

Dow Jones Industrial Average -- 1900 - 1950 - with exponential growth trend curve / log scale
Dow Jones Industrial Average — 1900 – 1950 – with exponential growth trend curve / log scale

With a logarithmic scale, the exponential “curve” becomes a straight line, and you can easily when the DJIA is above or below the trend line.

Points of Inflection

I use the mathematical term “points of inflection” in a somewhat informal way, to indicate points in the graph that take a sharp turn (indicating that the second derivative is infinite).

Take a look at the following graph of the DJIA since 1950:

Dow Jones Industrial Average -- 1950 - present - with exponential growth trend curve
Dow Jones Industrial Average — 1950 – present – with exponential growth trend curve

Prior to 1995, the graph of the DJIA moved in a fairly steady manner, not counting the minor jitters that occur every day. But in 1995, something very different happened. You can see that the graph should have leveled off and started falling, but instead, it turned a sharp corner to the left and moved rapidly upward, resulting in the tech bubble.

Economists are completely baffled by this. They certainly didn’t predict it, and even now, they have absolutely no explanation for it.

As I always like to point out, mainstream economists didn’t predict or explain the tech bubble, or why it occurred in 1995 instead of 1985 or 2005. They didn’t predict and can’t explain the real estate bubble, the credit bubble, the credit freeze, the financial crisis, or the worldwide trade and transportation freeze. They can’t explain what’s happening today, and they have no idea what’s coming next year.

I’ve often complained that mainstream economists must have some kind of brain blockage or mental deficiency, because they seem completely incapable of seeing a generational explanation, no matter how utterly obvious it is.

And in this case, the generational explanation is perfectly obvious. This was the time that the survivors of the 1930s Great Depression all disappeared (retired or died), all at once, leaving the incompetent Boomers to take senior management positions.

Once the tech bubble crashed in 2000, a different dynamic took place. Generation-Xers who were caught in the Nasdaq crash began reaching their 40s, and began taking middle management positions in organizations. Their contempt for Boomers and Silents is well known, and it’s well documented that the Generation-Xers created the tens of trillions of dollars of synthetic mortgage-backed securities that created the financial crisis. That explains the point of inflection around the year 2003.

Since my 2007 article, I’ve added a third point of inflection, occurring around March 2009, the beginning of the 2009 rally.

This was caused by the massive worldwide bailout and stimulus injection. Some $10 trillion of bailout and stimulus money was poured into the economies of America, Europe, China, and other countries. In doing so, the stock market bubble, which was in the middle of crashing, was revived again.

As you can see from the last part of the graph, the stock market seems to have begun its descent again. I would be very surprised if any bailouts or stimuli or quantitative easings will have anything like the effect they had in 2009, but I’ve been wrong about this before.

Things are quite different today than they were at the beginning of 2009 when these massive liquidity injections occurred. The U.S. debt level is almost unimaginably higher, so much so that any further major bailout or stimulus would be met with enormous domestic and international political opposition. China’s economy is in a massive bubble, and Beijing has been doing everything possible to slow it down. Several European countries are deeply in debt (remember the PIIGS?), and more stimulus is out of the question.

If I were to speculate (and these speculations have not always been correct), I would say that it appears that the stock market indexes will continue falling, subject to minor perturbations, and that the DJIA will be much lower by 2011.

That may be a speculation, but there is one thing that’s absolutely certain: By the Law of Mean Reversion, the stock market MUST fall sharply at some point. Whether it’s 2010 or 2011 or 2012 remains to be seen, but it is a mathematical certainty.

The P/E10 graph

Some people ask me why I don’t use P/E10 — price divided by the average earnings over the previous ten years. In fact, I used to use P/E10, but I decided that people understand P/E1 better, and that it makes the same point — that by the Law of Mean Reversion, there will be a stock market crash.

S&P 500 Price/Earnings Ratio (P/E10) 1871 to August 2010
S&P 500 Price/Earnings Ratio (P/E10) 1871 to August 2010

The P/E10 graph looks a little different than the P/E1 graph since, by averaging earnings over ten years, the results are less volatile and extreme. Nonetheless, you can see that there was a huge bubble from 1995 on, and the Law of Mean Reversion requires that P/E10 fall below the long-term average for an equivalent amount of time. Once again, this graph makes clear that we’re headed for the greatest financial crash in history.

(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.) (3-Aug-2010) Permanent Link

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