Financial topics

[abs]

-- Colin Powell interview

Here's a transcript of that portion of the interview:

> MR. BROKAW: If you were called into the Oval Office on January
> 21st by the new president, whoever it happens to be, and he said
> to you, "General Powell, I need from you your recommendation on
> where I begin. What should be my priorities?" Where would you
> start?

> GEN. POWELL: I would start with talking to the American people
> and talking to the world, and conveying a new image of American
> leadership, a new image of America's role in the world.

> The problems will always be there, and there's going to be a
> crisis come along in the 21st or 22nd of January that we don't
> even know about right now. And so I think what the president has
> to do is to start using the power of the Oval Office and the power
> of his personality to convince the American people and to convince
> the world that America is solid, America is going to move forward,
> and we're going to fix our economic problems, we're going to meet
> our overseas obligations. But restoring a sense of purpose, a
> sense of confidence in the American people and, in the
> international community, in America.
> http://www.msnbc.msn.com/id/27266223/

I think that Powell was simply responding to Brokaw's hypothetical.

John

John -

Yes, I agree he was responding to the hypothetical. That still doesn't answer why he calls out those specific dates - at the very least you'd have to admit that it was an odd thing to say. After I viewed the video, I did some more research on the net and it seems a lot of people are talking about this. Obviously nobody really knows what it could mean other than to take Powell's comments at face value . . . I certainly hope that we will not see a new crisis emerge on those dates and I can't answer how it is that Powell could have definitively known something like that in October.

At any rate, this is all somewhat of an off-topic digression.

Andrew

[The Grey Badger]

Why he called out those dates - because they are the next two days after the inauguration and there will be people who want to road-test the new American president. And many of those will not be our friends.

[mannfm11]

There was a crisis going on in October and it was damn clear in October that it would be going on in January. If the stock markets were in as big a panic as the Central bankers and government economists, it would be 2000 by now. We have a problem that has been brewing for 40 years coming to a huge boil and it isn't going to stop The Federal reserve has replaced literally all private borrowing in the US and it is clear that we are headed toward a crisis as John likes to point out was described in "The Bubble that broke the world". I have been reading a book by a guy named Jacques Rueff, a Frenchman that I found linked to the Mises.org website and he was active in French central banking in the 1920's and in the 1960's as well. He pretty much said that what caused the depression to be as bad as it became was the financial banking behind the trade. The US is still the reserve currency though it isn't convertible as it was prior. As a result, the US get a free loan in international trade and is put in a position of going broke. Our trade deficit last month was $57 billion. Our trade deficit used to go away when we had a recession, but there isn't any constraint or as far as that goes, any protection afforded normal Americans due to our position in international finance. Now that there isn't a private system of borrowing and the rate on government debt has fallen to a little over 2% on 10 year bonds (clearly a result of the international reserve status), we are headed for a showdown.

[freddyv]

Fred,

I agree with you that living standard has improved over the last 7000 years (since the days when "home" was a hole in the ground). However, compared to that time scale, the generation-to-generation time scale is like saying that because the Dow Jones Industrial Average went from 10 to 8000 in the last 100 years, therefore the stock market must have been gaining month-to-month.

From hearing the talking heads, I'm not at all convinced that the society in general is learning the lessons of 1929-1946. What percentage of people today know that Hoover launched public works programs, and was very heavily engaged in wage and price support? That FDR ran on a platform of shrinking government, balancing budget, and sound (gold) money? In other words, his electoral mandate in 1932 was to do exactly the opposite of what he ended up doing? That FDR's New Deal did not end the Great Depression? On the other hand, how many times have you heard this week alone, that WWII ended the Great Depression? Does that even make sense? That you have to have gasoline ration card to buy gas, no new car produced at all for half a decade, moms have to work because dads and brothers are sent off to war and die on a different continent, somehow that's rescuing a country from the Great Depression?

I don't disagree with you and never disagree with facts. My point was that nobody can say with 100% certainty that we will suffer another Great Depression within a certain time frame. It's the 100% that I disagree with because I don't think any of us have enough perspective.

Because we have already created the excess and because so many of the people in media and in charge seem to think we can finagle our way out of it the same way we finagled our way into it I think that it is as close to 100% as possible but I also know that this is an incredibly complex situation and that perhaps our noble leaders do know a lot more than we give them credit for. I hope they do but I'm betting they don't.

Hell, it's not even 100% certain that the sun will rise tomorrow and we will all be alive to see it, and that has a much longer track record than Generational Dynamics.

Don't get me wrong, I am enamored of the Generational Dynamics theory and I am impressed with what I read here but so were many impressed with the returns that Madoff gave them and so they didn't question. Even the best theories need to be refined and always questioned.

On June 3, 2004 John wrote the following:

Both the rising stock market and the increasing hopes for peace in the Mideast set important tests for Generational Dynamics, which predicts that at this time in history we're going in quite a different direction.

Generational Dynamics predicts that we're in the third year of a 1930s-style depression. Specifically, the prediction is that the stock market will fall to the 4,000 level by around 2006, and won't go up above 6,000 again until after 2015. That means that the current stock gains represent a new bubble, a bubble that will burst with major adverse news.

On January 1 of this year, I predicted that the DJIA would be around 7000 or lower at the end of 2003. That's not as certain as the prediction in the last paragraph, but I'm sticking to it for the time being. The prediction of a new depression is based on analyses using several different methodologies, all of which point to the same unfortunate conclusion. (Click here for the Finance section.)

With regard to the Mideast, Generational Dynamics predicts that Jews and Palestinians in the current generation are replaying the fault line war that occurred from 1936-1949, and that a major new war will break out before long. Click here for further information.

So today's events do indeed represent a major test for Generational Dynamics. Even though I enjoy being right as much as the next guy does, I still hope that Generational Dynamics is proven wrong, since then we'll all be better off. But I don't think that's going to happen.

What this proves to me is that you can't make such specific predictions using the type of data you have with Generational Dynamics. It made all the sense in the world that we were entering a secular bear market in 2000 and that the economy would buckle under the excesses of the previous two decades, yet it was not to be. Greenspan kept rates low and Boomers weren't quite ready to retire and we had a few more bubbles to blow up before we were through.

The point is that human nature is incredibly complex and while it's posssble to recognize trends, it is, IMO, impossible to predict specifics dates or specific events with 100% certainty but I hope that John continues on his path and I will remain a fan, even if he makes a mistake or two.

For me, Generational Dynamics is just one of the many predictors used to manage my finances and hopefully to keep me one step ahead of the herd.

--Fred

[John]

Dear Fred,

I believe that was the dumbest thing I ever wrote for this web site.
I even vaguely remember why I wrote it. Due to a certain level of
personal chaos, I remember having a feeling of total recklessness.
Fortunately, recklessness for me means posting nonsense on my web
site, as opposed to getting drunk and driving 100 mph down Main
Street.

During that year I was still developing the forecasting methodology,
and the weakest part has always been the timing. I knew then (and I
had known since 2002 when I first started looking at this stuff) that
we had to be headed for a new Great Depression, but I certainly
wasn't expecting anything like real estate and credit bubbles that
were just beginning to be become apparent in June 2004.

After that, I began using more careful phrases, "this region is
headed for war with near 100% certainty; it might start next week,
next month or next year, but it's coming sooner rather than later."

My first serious attempt at really nailing down timings was in this:

** Six most dangerous regions in world
** http://www.generationaldynamics.com/cgi ... nger041120

In this article, I identified the six regions of world where a
regional war would lead to a world war, and then I computed a
probability that a regional war would begin in one of the six
regions. I came up with something like 22% for 2005, and then
slightly higher for each year thereafter, if a war hadn't begun
earlier.

Since then, I've refined the timing by integrating concepts like
Chaos Theory and System Dynamics. The technique, as I've described
many times now, is to develop a near 100% certain trend forecast with
a very wide window -- perhaps decades long -- and then use short-term
events to narrow the window to months or a couple of years. I've
come a long way since that dumb statement in 2004, but I've been true
to my promise of complete openness by leaving that dumb article on my
web site, where anyone can still read it. I promised that anyone
would be able to read all my previous predictions at any time, and
I've stuck to that. I can still claim that no web site in the world
has anywhere close to the predictive success of this web site.

Even in the dumb 2004 article, I still had the trend right, but I got
the timing wrong.

** List of major Generational Dynamics predictions
** http://www.generationaldynamics.com/cgi ... redictions

However, with regard to the claims of "100% certainty," I usually try
to remember to say "near 100% certainty," but I don't always
remember. But to quibble about that is to miss the main point that
these predictions ARE near 100% certain. True, the sun might
explode, in which case there won't be a world war, but barring that
kind of event, there will be a world war.

I return to the analogy I've used elsewhere. If you're pumping water
into a big balloon, then you can be 100% certain that the balloon
will eventually explode (assuming that the sun doesn't explode
first). There's nothing chancy about this. The balloon WILL
explode. Those are the kinds of predictions that Generational
Dynamics makes. Population growth and generational changes are
analogous to pumping water into the balloon, and the result is
certain. My error in my reckless June 2004 article was in claiming
that I could predict timing as well. You can't predict the timing
better than approximately, but the end result is absolutely certain.

Sincerely,

John

[abs]

John -

I found a really interesting discussion of what happened to Japan during its deflationary period starting in the early 1990's. They still haven't really gotten out of their situation as you well know. Having said that, I think we can learn a bit about the mechanisms in play and what we might expect from a more tactical standpoint in the US. So far, the parallels appear strong and getting stronger based on announced plans/policies by Obama and others. Check out this presentation and let me know what you think. My guess is that you'll agree it helps bolster your arguments. Note - I've read some of your articles on this site talking about the Nikkei 225 and its decline and reversion to the mean . . .

http://www.csis.org/media/csis/events/0 ... an_koo.pdf

DISCLAIMER: I did not write this document but was referred to it from another site I'm active on.

Andrew

[Barion]

John,

Have you ever likened the predictive element of Generational Dynamics to earthquake prediction? It's very similar. Seismologists can never specifically say when an earthquake will occur, but they can say with near 100% certainty that an earthquake will happen on a given fault in a given timespan, usually decades. As a Californian living in Los Angeles, I deal with this topic frequently. The language you use about the coming generational panic/crash and clash of civilizations crisis war is very similar to what is said about, say, the coming Big One. It might happen tomorrow, next week, next year, or sometime thereafter, but it's going to happen with near 100% certainty over the long term because the geological record says it must happen every so often and the tectonic pressures increase with each passing year that there isn't a major earthquake. The fact that no one can say when it will happen creates complacency...just as GD's inability to say precisely when things will happen creates complacency.

I think the earthquake analogy works better than the tsunami analogy you frequently cite. Major earthquakes on active faults occur on a regular basis in geologic time. Tsunamis are extremely rare and strike out of nowhere. There have only been a few in all of human history. That doesn't fit the way you describe these generational panics and crashes, which occur with a certain amount of regularity (on average, every 70 years or so) and always have warning signs caused by building pressures that people conveniently ignore until it's too late, then after it happens they are struck by how sudden everything collapses.

[StilesBC]

John -

I found a really interesting discussion of what happened to Japan during its deflationary period starting in the early 1990's. They still haven't really gotten out of their situation as you well know. Having said that, I think we can learn a bit about the mechanisms in play and what we might expect from a more tactical standpoint in the US. So far, the parallels appear strong and getting stronger based on announced plans/policies by Obama and others. Check out this presentation and let me know what you think. My guess is that you'll agree it helps bolster your arguments. Note - I've read some of your articles on this site talking about the Nikkei 225 and its decline and reversion to the mean . . .

http://www.csis.org/media/csis/events/0 ... an_koo.pdf

DISCLAIMER: I did not write this document but was referred to it from another site I'm active on.

Andrew

The one problem with comparing contemporary America to 90's Japan is the condition of the rest of the world. Japan had a booming world economy to export to. America has a contracting global economy and nothing to export.

[abs]

John -

I found a really interesting discussion of what happened to Japan during its deflationary period starting in the early 1990's. They still haven't really gotten out of their situation as you well know. Having said that, I think we can learn a bit about the mechanisms in play and what we might expect from a more tactical standpoint in the US. So far, the parallels appear strong and getting stronger based on announced plans/policies by Obama and others. Check out this presentation and let me know what you think. My guess is that you'll agree it helps bolster your arguments. Note - I've read some of your articles on this site talking about the Nikkei 225 and its decline and reversion to the mean . . .

http://www.csis.org/media/csis/events/0 ... an_koo.pdf

DISCLAIMER: I did not write this document but was referred to it from another site I'm active on.

Andrew

The one problem with comparing contemporary America to 90's Japan is the condition of the rest of the world. Japan had a booming world economy to export to. America has a contracting global economy and nothing to export.

Yes, completely agree. What will happen here could easily be worse although there are clearly some parallels - increases in government spending and debt, "zombie banks" which are capitalized but won't/can't lend, increases in savings rates, shifts in psychology, zero (or negative) interest rates, drop in value of most or all asset classes (equities, real estate, etc.).

Andrew

[John]

Dear Andrew,

> I found a really interesting discussion of what happened to Japan
> during its deflationary period starting in the early 1990's. They
> still haven't really gotten out of their situation as you well
> know. Having said that, I think we can learn a bit about the
> mechanisms in play and what we might expect from a more tactical
> standpoint in the US. So far, the parallels appear strong and
> getting stronger based on announced plans/policies by Obama and
> others. Check out this presentation and let me know what you
> think. My guess is that you'll agree it helps bolster your
> arguments. Note - I've read some of your articles on this site
> talking about the Nikkei 225 and its decline and reversion to the
> mean . . .

> http://www.csis.org/media/csis/events/0 ... an_koo.pdf

This turned out to be a very interesting document.

The most interesting slide was Exhibit 24: The Yin Yang Cycle of
Bubbles and Balance Sheet Recessions.

You start with a bubble, and end with the next bubble. Here are the
steps in between. My own comments are in brackets. In particular,
I've estimated the dates of some of these steps, following the 1930s
collapse and today:

• (1) Monetary policy is tightened, leading the bubble to collapse.
  [Monetary policy was tightened in 2005-2007. Radical loosening began
  after the credit crisis began in August, 2007.]
• (2) Collapse in asset prices leaves private sector with excess
  liabilities, forcing it into debt minimization mode. The economy
  falls into a balance sheet recession. [This mostly happened to
  financial institutions after August 2007, but in the last couple of
  months it's been happening to all institutions.]
• (3) With everybody paying down debt, monetary policy stops
  working. Fiscal policy becomes the main economic tool to maintain
  demand. [This is President-elect Obama's planned fiscal stimulus
  package.]
• (4) Eventually private sector finishes its debt repayments, ending
  the balance sheet recession. [In the 1930s, this point was probably
  reached around 1935.]
  
  But it still has a phobia about borrowing which keeps interest rates
  low, and the economy less than fully vibrant. [This is the
  generational behavior change -- the survivors become extremely
  risk-averse.]
  
  Economy prone to mini-bubbles. [I'm not sure what this means.]
• (5) Private sector phobia towards borrowing gradually disappears,
  and it takes a more bullish stance towards fund raising. [This brings
  us to the 1960s and 1970s, when Boomers were in their prime.]
• (6) Private sector fund demand recovers, and monetary policy
  starts working again. Fiscal policy begins to crowd out private
  investment. [Monetary policy began working in the 1980s, with Volcker
  and Greenspan.]
• (7) Monetary policy becomes the maineconomic tool, while deficit
  reduction becomes the top fiscal priority. [This was clear in the
  1990s.]
• (8) With the economy healthy, the private sector regains its
  vigour, and confidence returns. [This is a mis-characterization.
  Change this to: "With the survivors of the Great Depression gone,
  standards and ethics suffer, creating a new bubble.]
• (9) Overconfident private sector triggers a bubble. ["A lethal
  combination of nihilistic, greedy Gen-Xers, and stupid, incompetent,
  greedy Boomers generates a huge new bubble."]

One particular thing that I focused on was the "Behavioral principle"
difference. I've been using the phrases "risk-seeking" versus
"risk-averse," but Koo uses "Profit maximization" versus "Debt
minimization." These phrases seem to capture the behavioral
differences very well.

However, Koo appears to contradict himself in a very interesting way.

Throughout the slides, he seems to be expressing confident that
fiscal stimulus will solve the problem and prevent a Great
Depression.

However, notice step (4) above: "(4) Eventually private sector
finishes its debt repayments, ending the balance sheet recession."

This is an interesting characterization of the deflationary spiral,
and it explains why a fiscal stimulus cannot possibly work: Because
at this time, the private sector is still very far away from
finishing its debt repayments. That's something that will take years
to work out.

Still, this has been a very instructive document.

Sincerely,

John