NOTE: This is an untouched, unedited version of an economic forecast made March 17, 2000 which came almost entirely true.
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:
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 way 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 as this table shows:
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.
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