The landing approach has begun. The flaps are down. A
moderate slowdown has hit the U.S. economy. Investors are
still optimistic. But consumer spending is way off.
Still... it seems that everyone believes that Alan Greenspan
will engineer a soft landing for the formerly high-flying
tech bubble. But according to one of the world's leading economists,
it's worse than blind faith. It's 'high-octane 'new paradigm'
*** Markets were closed yesterday - not much news to report.
*** The Dow and the Nasdaq ended the millennium on a sour
note. Both were off on Friday - with the Dow down 80 points
as the trading year came to a close; the Nasdaq was down 86.
*** The final week of the 2nd millennium saw a 1% decline in
the Dow - putting the down in the red 6.2% for the year. But
small caps rose 5% - leaving them in the hole only 4% for
*** The Nasdaq dropped 4% last week - bringing the index
down 53% from its high...and 39.3% for the year.
*** It was a bad week for Internets - a fitting end for what
has been a bad year. TheStreet.com's Internet index fell 6%
last week, to leave the Internet sector with a 74% loss for
*** Amazon.com, the best known of the Internet retailers,
and a frequent subject of these letters, has fallen nearly
90% since Jeff Bezos got his mug on the cover of TIME. The
stock was quoted on Friday at just $15.56. But even at $15,
Amazon is probably greatly overpriced. Amazon - that great
river of no returns - enters the 3rd millennium with no
proven business model, no profits and more than $2 billion
*** It was a bad week for the big techs too. MSFT ended the
year at $43.50. Cisco at $38.25. Oracle at $29.06 And Dell
at $17.44. Readers will note that these are all much smaller
numbers than those of the beginning of the year.
*** Not all stocks fell in the year 2000, however. Floyd
Norris reports in the NY TIMES that 86% of stocks in the
health care, finance, energy or utilities areas rose. But
only 31% of those in technology or telecommunications
managed to end the year in positive territory.
*** The DJ Utilities Index had a spectacular year - up 46%.
*** Analysts with major brokerage houses are almost
universally bullish for the new year. A survey of 10 of the
leading analysts reported in U.S.A. Today produced estimates
of where the S&P 500 will end the year in a range from a low
of 1400 to a high of 1715. The S&P 500 begins the year at
only 1320. Not a single analyst was bearish.
*** Gold stocks fell 2% last week. I got a letter from tech
maven Porter Stansberry urging me to reconsider my position
on gold in light of the fundamental change that has taken
place in the relationship between gold and money. Since the
Nixon administration, says Porter, gold has not been money.
And it doesn't act like money. It acts like a commodity -
going up during periods of inflation and down during periods
of deflation. If the credit bubble deflates, gold will go
down, not up, Porter predicts. More on this tomorrow.
*** The gap between inflation-adjusted bonds, or TIPS, and
regular 10-year T-bonds, has fallen from 1.90% in mid-2000
to 1.37% by the end of the year. Investors are not concerned
by inflation. They don't see it coming and see no reason to
give up any interest yield to protect themselves from it.
*** While investors' attention focuses on the Fed's next
rate hike and the decline in asset prices, Greenspan and
company are busily inflating. The money supply, as measured
by M3, rose $56 billion last week, to more than $7 trillion.
It has gone up $105 billion in the last 4 weeks and has
risen $1.64 trillion - or about 30% - in the last 3 years.
*** What happens to this `money'? If it finds its way into
asset prices, a bull market will soon return to Wall
Street...and all will be well. Gold can stay asleep for
another year or two. But will it? A prediction, below....
*** "In the time it took America to work out who had won the
election on November 7," opines the Financial Times, "the
seemingly unshakeable optimism surrounding the economy had
been replaced by a sudden onset of fear and gloom. Consumer
confidence plunged, stock prices swooned and the
manufacturing sector shed jobs at its fastest rate in 10
years." A year ago, America was on top of the world.
"American Triumphalism" was a theme of hundreds of newspaper
editorials. How times have changed.
*** Sales of existing homes increased 4.4% in November -
thanks to lower mortgage rates.
*** Montgomery Ward is closing down 250 stores, proving that
you can't make any money selling everything to everybody.
When I was growing up, `Monkey Ward' as we called it, was
where we did most of our shopping.
*** New Year's Eve and New Year's Day passed without
dramatic incident here at Ouzilly. Madame de Thierry, about
whom I have written to you in the past, came over for tea
with her son and his family. The kids played soccer in the
living room and kicked the ball into Elizabeth's Venetian-
glass chandelier...but it did no damage. Later, we all went
over to Pierre's for an aperitif - celebrating the baptism
of his granddaughter. The child's mother nursed the baby on
the side of the room as friends, aunts, uncles, cousins,
grandparents...and some relatives whom no one seemed to
recognize...drank champagne, ignoring her. Later, we had a
quiet family dinner - we pulled our `poppers', put on our
funny hats, welcomed the New Year, and went to bed.
*** Edouard, a friend visiting from Paris, and my son, Will,
went out after midnight and built a fire near the pond. The
wind came up. I was afraid they might set the woods on fire.
But when I got up the next morning, the woods were still
*** I'm a little concerned for Mr. Deshais, however. I
haven't seen him in a couple of days. He should be here. I
hope nothing has happened to him...or else I will have to
take care of the geese, turkeys, chickens, ducks and rabbits
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Like the Ghost of Christmas Future, I come to you today.
This is usually an exercise in self-humiliation. No one can
actually predict the future. And, as there are an infinite
number of things that might happen, the odds of guessing
right are slim.
Still, actions have consequences. And sometimes those
consequences are as obvious and predictable as what you
might expect when you see a sumo wrestler strapping on his
skates next to a lightly frozen pond.
That is what makes the Darwin Awards so entertaining. A
reader can see what is coming - though the consequences of
imbecility are invisible to the imbecile himself.
The most flagrant imbecility of the year 2000 was the absurd
pricing of Internet and technology shares. An observer need
not have gutted a chicken nor studied the stars in order to
see how this absurdity would end. So, I do not expect any
special applause for my prediction last year at this time
that "the Rocket Chips will fall to back to Earth."
Since January of last year, the Internets have felt the
earth's gravitational pull and have lost 74% of their value.
Many of them have already struck the ground or been burned
upon re-entry into the Earth's financial atmosphere.
Nor should I expect any measure of respect for my corollary
prediction that the blue chips would do relatively better
than the Rocket Chips, or "old economy stocks will
outperform new economy issues," as I put it.
Sure enough, Dow stocks have held up pretty well - with only
a 6.2% loss for the index. And many stocks suggested in
these pages are up in value - most notably, Philip Morris,
which almost doubled in value.
My other major predictions for last year were less obvious:
I forecast a decline in "American Triumphalism" and a fall
in the dollar. I said that "Main Street and Wall Street
would converge." I suggested that gold, oil and natural
resources would increase in price...and I probably predicted
a few other things I would just as soon forget about.
But here we are, dear reader, another year older. Another
year wiser...and, I hope, another year richer.
"All that really matters," said my friend and ex-neighbor
Francois last night. "is your health. Everything else you
can work out. But when your health goes - you're finished."
Francois retired in September. Then, his back gave him
trouble - to the point where, a couple of weeks ago, he
could barely walk. Louisette's hand required surgery, from
which she has yet to recover.
"With a comfortable house, a big stack of firewood, and a
big garden," Francois made a sweeping gesture with his hand
to point out the features of his new life in retirement,
"money doesn't mean much to us. But health? Ah...that's
You may wonder why, dear reader, I interrupt this look into
the future with this little vignette from my visit to
Francois last night... It is only to keep things in
perspective. This is the nice thing about making financial
predictions - they don't really matter.
So, recognizing that the predictions that follow are as
important as they are likely to be accurate, I offer the
*** Last year, it was the tech and Internet stocks that got
hit. This year, it will be the overpriced blue chips. GE,
for example, will fall sharply.
*** Deflation, not inflation, will bedevil the markets and
frustrate investors. Already, more than $3 trillion has
disappeared from U.S. capital markets. This was wealth on
paper that had no corresponding real economy parallel. There
were no factories, no sales, and no profits to back it up.
Even after the losses suffered by investors in the year just
finished, there remains another $5 to $7 trillion in excess
valuation on Wall Street. Unless the Fed can pull off
another boom in the credit cycle, more of this paper wealth
will be destroyed in the year ahead.
*** Stocks are still much too expensive. The Dow P/E is over
20. The Nasdaq P/E - even after getting cut in half from its
high point - is still close to 100. Again, barring a
successful credit boom - which is unlikely - the Dow should
sooner or later sink below 6,000...and the Nasdaq should
fall below 1,000.
*** The Greenspan Put will prove worthless. Greenspan will
cut rates. And he will increase the money supply. But these
efforts will be too little and too late to offset the
effects of a deflationary collapse. Investors who borrowed
on their homes in order to buy stocks last January paid a
high price to play the market - a loss of nearly 30% on
average. While not yet acting like Japanese, they will be
more cautious in the year ahead. And businesses, too, will
be reluctant to add capacity while inventories stack up in
warehouses. The Fed Funds rates will come down. But the real
return on borrowed money will remain negative for most
borrowers. As a result, people will reduce their debt levels
and begin saving.
*** The U.S. dollar will continue to decline against the
euro. Against all odds, the euro will rise above $1 - and
beyond. This will have a number of serious consequences.
Overseas investors will withdraw funds from U.S. capital
markets. U.S. dollar-denominated assets will fall in price.
Prices of foreign goods will rise. And, the trade deficit
*** Genius will fail - derivative positions total about 10
times the entire U.S. GDP. Trillions of dollars are tied up
in positions that are far more precarious than their owners
think. Coming in 2001 - big bankruptcies. Expect major
surprises from major players.
*** Bankruptcies and deflation will reawaken the inner child
in gold - the golden boy of monetary stability. Gold will
rise in price as investors become concerned about the
dollar, financial institutions, derivatives and debt. More
about this tomorrow.
*** Recession will begin before the end of the year and be
worse than expected and more widespread. Along with Bush and
Greenspan, globalization, deregulation, securitization,
derivatization and laissez faire economics will be blamed.
More to come....
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Last modified: April 01, 2001
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