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Subject: Latest Economic Prognosis
Economic Update 
HOME PAGE: Year 2000 Economics 


March 17, 2000 

"Strange times are these in which we live 
when old and young are taught in 
falsehoods school. And the one man that 
dares to tell the truth is called at once a 
lunatic and fool" (Plato) 

Remember the event mentioned in the last message? An 
event to occur on March 16? Well, it was a panic 
alright...a buying-panic-rally with the Dow sky-rocketing 
499 points! 

The latest gross domestic product report indicated the 
U.S. economy grew at an astonishing (and of course 
unsustainable) 6.9% at an annual rate in the last quarter 
of 1999! New Economy, or bubble? Actually, both. 
Yes, the nature of conducting business is changing due to 
the current technological innovation--exactly like the late 
1920's. Yes, this is additionally the greatest speculative 
mania of all-time, exceeding even that of 1929 in virtually 
all respects. This is a far more dangerous situation as the 
market is now heavily intertwined with consumer 
spending, borrowing and the economy in general, as well 
as massive foreign ownership, the result of persistent, 
record trade deficits. 

Notice the eerie calm and silence among bears in the 
past month or two? They all seem to have given up, 
exhausted by the relentless bullishness of the complacent 
majority, thereby throwing in the towel; or at least 
hibernating. Their growl has turned to an impotent 
whimper. This is how one can determine calamity lies 
directly around the corner: You are the only one left; the 
last bear crying wolf, adamantly screaming, "The end is 
nigh!" The current environment is a contrarian's dream 
come true. Then again, that's what we all said last year, 
and the year before, and...well, ahem..THIS TIME it's 
different! 

Even though the vast, vast majority of stocks are 
currently well into a bear market, the public and media 
seem to be heavily focusing only on the rallies occurring 
mostly to the fringe, tulip-mania sectors; dot-coms, 
bio-tech and computers. For some months 
now--particularly since January--extreme volatility due 
to "distribution at the top" created a situation where vast 
quantities of money gushes from the interest-rate 
sensitive Old Economy sector into the fad, New 
Economy, Nasdaq stocks. (Remember the mid-1990's 
fad: the Global Economy? Or the Asian Tigers?) 

A mania can be discerned by its exponential time of 
doubling. Eventually it will and must come to an abrupt 
U-turn--a crash-- thereby free-falling with great losses in 
a very short period of time. That time is close at hand. 

The following demonstrates this recent growth pattern as 
the Nasdaq broke through several barriers, and the time 
to arrive at such: 

NASDAQ 
MILESTONES 


First 
Crossing 1000 points 1,248 weeks 
2000 points 156 weeks 
3000 points 60 weeks 
4000 points 17 weeks 
5000 points 10 weeks 
Back to 4000 points? This next number will 
be smaller, as a final 
blow-off to 6000--OR-- 
the final reckoning is 
at hand. 

This is occurring in the face of continually rising interest 
rates, tight labor market, ultra-booming domestic 
economy and record volatility. In this surreal state of 
being, the market can fly anywhere; violently crashing 
one day, violently rallying the next. The markets will in 
fact continue to do so over the coming weeks. This is a 
speculator's dream come true; and a nightmare for the 
average investor. It seems pointless at this juncture in 
attempting to call the absolute, exact top in terms of the 
entire conglomerated market, but the general top we 
are indeed immersed in, or have surpassed, at the very 
present. 

The big clincher, or the nail in the coffin, will be a 
half-point hike in interest rates by the Fed on March 21. 
I don't know if this was a prophetic dream or not 
(therefore from God, like others I have had recently), 
but in early March I had a lucid dream that this was 
indeed the case: interest rates, in this vision, went up a 
full half-point, and the press made a big commotion of it, 
and so did investors: there was chaos for several days. 
Whether this was for March 21 or some other time in 
the future cannot be determined, but mark my words: it 
will ultimately happen soon enough. 

In any case, time's well over-due for the market to crash 
horrendously in the near-term, and the Nasdaq will lead 
the way; don't be caught in the maelstrom. 

If the final market top (well, at least in the Dow and 
S&P) was reached January 15, 2000 at 11,722, and if 
we see a replay of 1929 and 1987, it can guesstimated 
that since the crash of those years were 55 to 60 days 
from the peak, mid-March onwards will be very, very 
nasty. 

But if the top is determined by the now significant 
Nasdaq, the Crash still lies well down the line. 
Historically, often, the actions of the stock market 
precedes real economic conditions by three to six 
months. Therefore, if this scenario play out in the weeks 
ahead, the upcoming recession will begin late this year, 
after the elections, but observing the strength of the 
here-and-now bubble and all the momentum it contains, 
a nasty downturn into 2001 and beyond seems more 
plausible. Poor 'ol G. W. Bush; having to suffer the fate 
of his father; he had better be skillfully adept at shifting 
or deflecting blame, for he and his political party will be 
held responsible for the economic disaster that is to 
occur during his reign. 

The precise character, magnitude and length the 
up-coming but not imminent recession is difficult to 
determine with any precision, yet will certainly be one of 
the most painful in this nation's history, in order to match 
and purge the speculative excesses of the currently 
unprecedented boom. 

The present sentiment throughout the status-quo is that 
the U.S. will continue the record 9 year old upturn, 
indefinitely extending well into the years ahead, is 
obviously unrealistic. There are many indicators now 
popping up from all sides since early this year that are 
convincingly evidentiary of an impending U.S. recession 
that may begin and manifest as early as late this year, 
which will definitely snowball into 2001 and 2002, and 
the effects much longer. 

First, Greenspan perceives and links the boisterous 
economy of late to possible inflationary pressures, which 
he feels obliged to intervene. There is little real evidence 
of this supposed inflation, of course, but the Guru 
Chairman is stubbornly adamant about continually raising 
interest rates until things get ugly. He is determined to do 
this well before the elections, and it is a sure bet rates 
will go up--possibly wayyy up come the March Federal 
reserve open market meeting. So far investors merely 
shrugged off the last three hikes, which were minute slaps 
on the wrist. But this next hike and those 
following--particularly if it is more than a quarter 
percent; the straw that breaks the camel's back. 

It is also clear he and his cronies are attempting to 
deflate the irrationally exuberant stock bubble. 
Preferably he may wish and hope for these actions and 
medicine to be delivered cautiously, administered over 
the months ahead, resulting in a "soft landing," thereby 
averting a crash and recession. This has been attempted 
several times throughout history, and throughout history 
has always failed, resulting in disaster. 

********* 
Japan 

Once perceived as an economic miracle and model to 
be followed, has actually been in what may be called a 
depression for the past decade after its bubble popped 
in 1990. Its stock market is still half the level achieved in 
1989. Interest rates are almost zero, and deflation is the 
predominate worry as they reel under the weight of a 
trillion dollars in bad, un-performing bank debt procured 
during their version of America's 1920's: the 1980's. 

The much touted Asian recovery following the 1997 and 
1998 financial crises is, at best, a temporary and illusory 
aberration. While most east Asian countries have been 
able to avert further declines and collapses, and their 
stock markets are recovering, the underlying 
fundamentals of this region's largest economy, Japan, 
continues to slide in and out of oblivion. After spending 
all of 1998 in recession, it is back in recession with GDP 
declining 3.9% on an annualized basis in the third quarter 
of 1999 an is fully expected to have declined in a similar 
fashion in the last quarter, as the soon-to-be-released 
official figures will confirm. This is in spite of massive, 
stimulative government borrowing and spending with 
government deficits approaching 9% of GDP, adding to 
the astounding overall debt level of nearly 150% of 
GDP. 

One of the major factors recently and currently 
preventing a collapse and why the 1998 crisis was halted 
is the booming U.S. economy as flush consumers snap 
up record amounts of autos and other products in the 
recent and on-going credit-fueled spending binge, 
generously provided by record credit issuance by Santa 
Greenspan and his elves. If Japan cannot seem to 
recover to any significant degree with all this robust 
demand the U.S. and other Western nations are offering, 
what happens when Americans stop spending and enter 
a recession? 

Answer: A spiraling deflationary disaster. When--not if, 
when--the U.S. stock market crashes and enters its 
long-term secular bear market, a negative wealth effect 
will take hold and demand for overseas products will 
abate quite substantially. In this market collapse, foreign 
investors are likely to begin pulling out of the currently 
high-flying U.S. indexes, further precipitating a 
downward stock-price spiral. The dollar would drop, 
thereby increasing the cost and therefore demand of 
these foreign products, further reducing global demand. 

The cycle of borrow-and-spend on the part of 
consumers to that of save-and-retrenchment and 
attendant asset price deflation (if it turns out to be a 
general commodity and price inflationary recession, 
assets will lose their relative value to goods) will boost 
the current non-existent savings rate back to the 
historical 6 to 10%. 

Structural, systemic weakness, such as margin debt and 
over-leverage that are always masked during the bubble, 
will become apparent in a decline of more than about 18 
to 20%, thereby initiating a financial crisis similar to the 
fall 1998 Long Term Management debacle. The former 
almost precipitated a massive cascading cross default 
among banks and financial institutions until the Fed came 
to the rescue, bailing them out. This time will be 
substantially worse than the environment of 1998, and 
there is more at stake. 

Contemporary New Age/Economy/Era 
economist: 

"We are living in an age of increasing prosperity 
and consequent increasing earning power of 
corporations and individuals. This is due in large 
measure to mass production and inventions 
such as the world never before has witnessed. 
The rapidity with which worthwhile inventions 
are brought out is the result of the tremendous 
research laboratories of our great [technology 
companies]. Applications of these inventions to 
business means greatly enhanced earning 
power. This is a new and tremendously powerful 
factor in the [business] world and one which 
never before existed." 

Just before that paragraph, the gentleman said, 

"Stock prices are not too high and Wall Street 
will not experience anything in the nature of a 
crash. There may be a decline in stock prices, but 
not anything in the nature of a crash." 

Who is this economist? The gentleman who 
spoke the words quoted above was Professor 
Irving Fisher of Yale University, dated 
September 5,1929, acknowledged at the time as 
being a stock market expert. 

The fact that the Dow was down 47% in less 
than ten weeks from the date that quote was 
published is scary indeed. History doesn't 
repeat; only the names and faces have been 
changed... 



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***** 

Take Care, and pray; it works! 
Daniel