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

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 thestock market bubble was rising so quickly that it was becomingdangerously parabolic and might collapse at any time. The worldwideselloff during the last week of stocks, bonds and commodities israising fears that the time is at hand. There is no way to predictexactly when a crash will occur, or whether the current selloff is theleading edge of a crash, but we can be absolutely certain that one iscoming at some point.

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

Mainstream economists are completely incompetent to recognize what’shappening. Just remember what mainstream economists were saying in2006 about a possible real estate bubble that I and a few others werewriting 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 thatthere had been a real estate bubble four years earlier. Thesesomething as obvious a huge real estate bubble until four years later.This is the caliber of people you’re depending on if you listen toCNBC or read the financial news. You might as well ask your five yearold daughter for investment advice. It won’t be any worse.

Last week’s global selloff was apparently triggered bya statement by Fed chairman Ben Bernanke that the Fed mightmoney into the banking system, which investors then used toprop up the stock market. (Remember in 2007 how many peoplecomplained about President Bush’s $60 billion stimulus package?)

The reasons that analysts and “experts” gave in 2006 for whythere was no real estate bubble were ridiculous, and the reasonswe’re hearing today for last week’s stock market sellout soundequally 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 areenormously overpriced.

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

The largest bubble in history

If you look at the graph at the top of this article, you cansee what’s going on. Every 30 years or so, the P/E index (alsocalled “stock valuations”) falls to the 5-6 range, and itappears to on its way down to that level again, which meansthat the Dow index will fall to 3000 or lower.

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

The signs in the last week are that investors are selling everythingthey can into order to pay off money they borrowed to invest instocks. A ZeroHedge article calls it “A Dash for Cash,” and documentshow one asset class after another has fallen sharply in the last fewdays. These asset classes include U.S. Treasuries, bonds from Spain,Portugal, Greece, and Italy and other European countries, municipalbonds, commodities, including gold and silver. There will be pressureon Fed chairman Bernanke to reverse himself next week, even if areversal 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 formassive demonstrations and protests on Sunday, June 30, in response toto a rally by hundreds of thousands of Islamists in support of theMuslim Brotherhood and president Mohamed Morsi on Friday (June 21) inCairo and other cities. The protesters plan to demand the resignationof Morsi, and threaten to continue the protest until he resigns.Morsi called for calm and accused the Tamarod protesters trying toincite instability and of supporting the the regime of oustedpresident Hosni Mubarak of inciting instability. On Saturday, hewarned the Tamarod protesters to restrain themselves on June 30:

“They want to bring back the past because therevolution harmed their interests. (People) must stop their evilplans because they do not want calm and stability forEgypt.”

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

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