World View: The 'Experts' Scramble to Explain the Stock Market Plunge

This morning's key headlines from

  • The 'experts' scramble to explain the stock market plunge
  • The largest bubble in history
  • Egypt's 'Tamarod' campaign heads for mass confrontation on June 30

The 'experts' scramble to explain the stock market plunge

S&P 500 Price/Earnings Ratio (P/E1) Index, 1871-present
S&P 500 Price/Earnings Ratio (P/E1) Index, 1871-present

I've written a couple of articles in the last four months that the stock market bubble was rising so quickly that it was becoming dangerously parabolic and might collapse at any time. The worldwide selloff during the last week of stocks, bonds and commodities is raising fears that the time is at hand. There is no way to predict exactly when a crash will occur, or whether the current selloff is the leading edge of a crash, but we can be absolutely certain that one is coming at some point.

I hope that no regular readers of Generational Dynamics World View are still in the stock market. If you are, then you have no one to blame but yourself for what happens to you.

Mainstream economists are completely incompetent to recognize what's happening. Just remember what mainstream economists were saying in 2006 about a possible real estate bubble that I and a few others were writing about:

  • "Housing prices can't go down -- people have to live somewhere."
  • "Banks won't foreclose -- it's not in their interest to do so."
  • "These housing construction firms know what they're doing, and they wouldn't be building houses if it were just a bubble."
  • "Bubbles are impossible because of laws and regulations that were put into place in the 1930s."
  • "They're not making any more land, you know."
It was not until 2010 that mainstream economists even admitted that there had been a real estate bubble four years earlier. These "experts" are so incompetent that they couldn't even recognize something as obvious a huge real estate bubble until four years later. This is the caliber of people you're depending on if you listen to CNBC or read the financial news. You might as well ask your five year old daughter for investment advice. It won't be any worse.

Last week's global selloff was apparently triggered by a statement by Fed chairman Ben Bernanke that the Fed might "taper" its policy of pumping $85 billion PER MONTH of money into the banking system, which investors then used to prop up the stock market. (Remember in 2007 how many people complained about President Bush's $60 billion stimulus package?)

The reasons that analysts and "experts" gave in 2006 for why there was no real estate bubble were ridiculous, and the reasons we're hearing today for last week's stock market sellout sound equally ridiculous:

  • "The U.S. economy is so good that stocks will continue to go up."
  • "People are being completely irrational to sell their stocks just because of a few words from Ben Bernanke."
  • "Bernanke's words are now priced into the market, so the market will not go up again."
  • "Whenever stock prices fall, investors rush in to take advantage of the low prices, so stocks go up again, so now's the time to buy."
  • "The stock market fell over 50% in 2008, but economists figured out what went wrong, so it won't happen again."
The reason that a big selloff must occur is that stocks are enormously overpriced.

It's impossible to predict with certainty when the current bubble will deflate, but it's possible that it's deflating right now. Stocks are enormously overpriced by historical standards. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index on Friday (June 20) morning was 17.99, which is extremely high by historical standards, indicating that stocks are far overpriced.

The largest bubble in history

If you look at the graph at the top of this article, you can see what's going on. Every 30 years or so, the P/E index (also called "stock valuations") falls to the 5-6 range, and it appears to on its way down to that level again, which means that the Dow index will fall to 3000 or lower.

What this graph also shows is that, since 1995, the stock market has experienced the largest bubble in history. When it does collapse, whether next week, next month, or next year, it will be the biggest financial crisis in history. By the Law of Mean Reversion, the stock market won't recover for decades.

The signs in the last week are that investors are selling everything they can into order to pay off money they borrowed to invest in stocks. A ZeroHedge article calls it "A Dash for Cash," and documents how one asset class after another has fallen sharply in the last few days. These asset classes include U.S. Treasuries, bonds from Spain, Portugal, Greece, and Italy and other European countries, municipal bonds, commodities, including gold and silver. There will be pressure on Fed chairman Bernanke to reverse himself next week, even if a reversal is a sign of desperation. Zero Hedge

Egypt's 'Tamarod' campaign heads for mass confrontation on June 30

Egypt's anti-government "Tamarod" (or "Rebel") campaign is calling for massive demonstrations and protests on Sunday, June 30, in response to to a rally by hundreds of thousands of Islamists in support of the Muslim Brotherhood and president Mohamed Morsi on Friday (June 21) in Cairo and other cities. The protesters plan to demand the resignation of Morsi, and threaten to continue the protest until he resigns. Morsi called for calm and accused the Tamarod protesters trying to incite instability and of supporting the the regime of ousted president Hosni Mubarak of inciting instability. On Saturday, he warned the Tamarod protesters to restrain themselves on June 30:

"They want to bring back the past because the revolution harmed their interests. (People) must stop their evil plans because they do not want calm and stability for Egypt."

There was already sporadic violence between supporters and opponents of Morsi in Friday's pro-Morsi demonstrations. But now 34 political parties have announced plans to participate in the upcoming anti-Morsi protests, and some are promising smaller protests all week, leading up to Sunday. It's feared that there will a lot more violence between the two groups next Sunday. Daily News Egypt and Al-Ahram (Cairo)

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