The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://nick.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
Having said that, every now and then, you wake up in the morning, open the blinds and see a massive tidal wave heading your way, all the while thinking, "That's odd. I live 200 miles inland." Yes, on occasion, the Big One really does come along.
But it is rare, nonetheless. One average, they occur every 60 years or so, or about once in every lifetime. The crash of 1929 was 69 years ago.
Economic historians have identified six global Big Ones since 1634. Each of these Big Ones foreshadowed worldwide asset and economic depression. These were:
There is an entire genre of academic study that looks at economic and investment cycles. As you might expect, this line of theory is called "Cycle Theory" and has been derived from the work of a Marxist economist (now there's an oxymoron) named Kondratieff, who wrote in the 1920s while serving as a rather low-level agro-economist in the Soviet Union. Later, and largely because of his writings, he gained the disapproving interest of party officials and disappeared in some Godforsaken labor camp in Siberia.
In any event, in an attempt to be brief, an attempt, by the way, at which I often fail, allow me to briefly review some major tenets of cycle theory.
Cycle theory holds that all economic systems have certain reoccurring cycles. The most familiar and common of these is called the "Short" or "inventory" cycle by cycle theorists. Normal people call them recessions.
During inventory cycles, merchants and producers overestimate final demand, and therefore over-order and over-manufacture product. Eventually, inventory builds to the point in which it becomes clear that accumulation must be slowed and reduced. So, new orders dry up, and factories cut production and lay off workers until the inventory is reduced to a level that incites new orders. During this inventory drawdown, falling production and employment decrease aggregate demand and complicate the task of eliminating the excess inventory. In some cases, the process can feed upon itself and aggravate the inventory problem, prolonging and deepening the trough of the cycle.
Keynesian fiscal stimulus is seen as the cure for entrenched inventory cycle weakness. Alternately, supply-siders see reduction in marginal tax rates as the key to proper stimulus.
On the other end of the spectrum is the "Long Cycle". It is also referred to as the "Long Wave." The long cycle is a credit cycle. The theory here is that long-term economic growth is dependent upon credit creation, that is, debt. As debt grows, the assets are piled directly and indirectly into increasing productive capacity. Eventually, the debt-fueled production capacity grows past the point at which the aggregate production can be sustained. As a result, the debt cannot be serviced, and defaults occur. So, instead of laying off workers to reduce inventory, in effect, the economic system is forced to lay off (close) production facilities to get production and demand back into equilibrium.
But, as production capacity is destroyed, and debt defaults, the economy suffers and aggregate demand falls further, forcing a lower equilibrium level with more shuttered plants and defaulted loans. In this way, the system can begin to feed upon itself, and a great wave of asset and demand destruction sweeps the system. This process is called "systemic deflation".
There are serious observers who think THIS is what is occurring today on a global scale. Hence, we are on the verge of the next global Big One.
Because these are rare events, there are not a lot of people who have experience in controlling or resolving them. How to go about such a task is the subject of even more vociferous debate than on how to control and resolve inventory cycles. In addition, these questions are largely ignored because they are very infrequently driven to the front burner of consideration simply because of their infrequency and remote nature.
So how big is a BIG ONE? Big ones are big. Terrifyingly big. Market corrections inspired by inventory cycles can be unsettling enough, and hack 30-45% from your portfolio value. The BIG ONE, driven by global asset deflation, will destroy 85% to 98% of your portfolio value. People's lives are forever altered by these things. People end up losing jobs and homes and everything of material value.
But alas, life WILL go on, and in the long run, the market will be much higher in the future than even its most recent peak....
[Nick's note: Jim Ward wins the essay contest.]
How many newsletters have passed since I wrote that e-mail... and how many years from now will it be until I am forced to write to chastise your perma-bearishness once again?
This market has few precedents, but many constants... you are one of the constants. I got "back into the water" and have done very nicely, thank you? I buy and sell small positions almost in day trader fashion through my e-broker for $12 a trade... never tying up more than I could afford to lose on any given week or day.
You still have a modicum of credibility in my world, much like a Joe Granville... though I feel my "stopped clock" analogy is probably more reflective of your analysis. I do believe that someday your "boy who cried wolf (bear)" mentality will be correct. But it has been going on for so long and has been so extreme, there will be little redemption in "finally" being right!
The first time around (when I emailed you), I was so afraid the market would crash after my complaints, that I took on a conciliatory tone. But now I am emboldened by your continued inability to predict market events (what is a newsletter supposed to do, after all?).
Here is my forecast: The market will go down! And then it will go up again, but not necessarily in that order. (How much more honest could a person be in their prediction?) As a final note, don't buy or sell on my advice, I am completely right but I may be wrong!
("Iris Goldman" is actually a 38-year-old man from New Jersey.)
[Nick's reply to "Iris": Fortunately for me, it doesn't bug me when other people don't share my point of view.... after all, most of the country doesn't. I certainly hope that it doesn't bug you that I have not fallen in line with the rest of the lemmings. May you escape the meltdown with your finances intact.
I might also add that I don't hide behind a pseudonym in case I'm
wrong. My mistakes (along with my successes), plainly documented
in past issues and available at
http://fennel.assumption.edu, are
indelibly attached to my real name.]
According to this temperature scale, today's market makes summer in Death Valley seem air-conditioned in comparison. By the way, Chicago's all-time extremes are 106 and -27 degrees.
Here is the formula:
Tmarket=60+50*[ln(PB/Pave)]/(ln 2)]
where Tmarket is the market temperature in degrees F, PB is today's valuation [in relation to book value], and Pave is the historical average valuation or intrinsic business value. ["ln" is the natural logarithm function. /Nick]
For the S&P 400 Industrials, Pave is 1.7 times book value.
I have developed a formula for asset allocation. A portfolio is divided between stocks and cash. The greater the valuation, the heavier the cash position and the lighter the stock position. At a sufficiently high valuation (like the last 7 years), you have an all-cash portfolio. At a sufficiently low valuation, you have an all-stock portfolio.
Here is the formula:
PS=100% when PB<1.1
PS=(155-50*PB)% when 1.1<PB<3.1
PS=0% when PB>3.1
where PS is the percentage of the portfolio in stocks, and PB is the price/book ratio of the S&P 400
Some examples:
Great Depression: PS=100%, PB<1, Tmarket is below 0, BRRR!
1982 bottom: PS=100%, PB=1.0, Tmarket=22 degrees, deep winter.
1974 bottom: PS=100%, PB=1.1, Tmarket=29 degrees, January-like.
1978 bottom: PS=95%, PB=1.2, Tmarket=35 degrees, December-like or February-like.
1980 top: PS=85%, PB=1.4, Tmarket=46 degrees, March-like or November-like, chilly.
1976 top: PS=75%, PB=1.6, Tmarket=56 degrees, mild.
AVERAGE: PS=70%, PB=1.7, Tmarket=60 degrees, mild; level last seen in 1985, 14 years ago.
1987 bottom: PS=55%, PB=2.0, Tmarket=72 degrees, pleasantly warm, May-like or September-like.
1966 and 1972 tops: PS=40%, PB=2.3, Tmarket=82 degrees, very warm, summerlike; level last seen in 1989, 10 years ago.
1990 bottom: PS=30%, PB=2.5, Tmarket=88 degrees, hot.
1990 top: PS=5%, PB=3.0, Tmarket=101 degrees, very hot.
1987 top: PS=0%, PB=3.2, Tmarket=106 degrees, VERY HOT.
1994 bottom: PS=0%, PB=3.6, Tmarket=114 degrees, DESERT HEAT.
1994 top: PS=0%, PB=4.0, Tmarket=122 degrees, EXTREME DESERT HEAT.
Today [February 1999]: PS=0%, PB=9.0, Tmarket=180 degrees, SO HOT THAT SAGUARO CACTI DROP LIKE FLIES.
[May 1999: Boiling point? Jason places second. "Iris Goldman"
wins the booby prize. /Nick]
I would not have a dime in this market. The suckers ALWAYS get caught up in the mad rush to the top at the end. - Paul Milne
[H]umanity is likely on the verge of learning the same lesson yet again -- the lesson that our grandfathers and grandmothers learned, that our brothers and sisters in Asia and other areas of the world learned in 1997 and 1998, that the market is cyclic, that caution cannot be thrown to the wind, and that it is not a gambling table. And, above all -- whether or not one's opinion is that investors are gambling -- we must remember that one's investment dollar is just that -- an investment dollar, to be diversified or concentrated in the various investment markets available, not just in stocks. - Dan Ascani
The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings. - Paul Volcker
Were it not for the situation on Wall Street, I might now be leaning towards a scenario of recovery in business confidence and investment, with the ultimately inevitable "Great Reckoning" put off to some future time. But the Wall Street Sword of Damocles hangs there; and the rest of the world remains too vulnerable to withstand a market crash in America. My favoured scenario now is that the last act of the unfolding drama will be exactly this - a Wall Street crash. Followed by the obvious effects on the rest of the world. But.... there is no way to tell how long all this can go on before that happens.- Max Moseley
The great French sociologist Jacques Ellul noted.... that one of the three great myths on which every civilized society is based, and without which no propaganda can be successful, is the "myth of progress." It is this myth which burns brightly in the bosom of modern man and imbues him with the comforting (if mistaken) belief that progress always continues in a straight line and that every endeavor undertaken by man in the collective - be it widespread participation in a bull market or anything else - will always tend toward progress and success. Without a widespread embracement of this myth a speculative bubble is impossible. The events of 1929 - and of our day - attest to that. - Clif Droke
None of the US expansions of the past 40 years died in bed of old age, every one was murdered by the Federal Reserve. - Rudi Dornbusch [M.I.T economist]
Some investors appear to believe that the American economy has become a kind of perpetual-motion machine in which stock-market gains fuel consumption and investment, which in turn fuel further stock-market gains. It would be nice, but it would also mean the end of economic history. Shocks and interruptions, regrettably, always happen. The more the American economy, and by proxy the rest of the world, depends on a rising stock market, the more worried we should be. - David Smith
Fair weather cannot always continue. The economic cycle is in progress today, as it was in the past. The Federal Reserve System has put the banks in a strong position, but it has not changed human nature. More people are borrowing and speculating today than ever in our history. Sooner or later a crash is coming and it may be terrific. Wise are those investors who now get out of debt and reef their sails. This does not mean selling all you have, but it does mean paying up your loans and avoiding margin speculation.... Some day the time is coming when the market will begin to slide off, sellers will exceed buyers, and paper profits will begin to disappear. Then there will immediately be a stampede to save what paper profits then exist... - Charles Babson [September, 1929]
In the 1970s, the top 1 percent of households had about 20 percent of the national wealth. This was widely considered excessive. Today, the number is over 40 percent and climbing. Thirty years ago, about 10 percent of American households were broke, with a net worth of zero or less. Fifteen years ago, the number was about 15 percent. Today, the number is almost 20 percent. Adjusting for inflation, blue-collar workers are making less than they did a quarter-century ago. The U.S. savings rate is now negative 0.5 percent, the lowest level since the early Depression. Most Americans have a lower net worth than they did 15 years ago, when this greatest stock-market rally in history began. The bottom two-fifths of households have lost about 80 percent of their average net worth. The middle fifth has lost about 11 percent. The richest 1 percent of America owns more wealth than the entire bottom 95 percent combined, and the inequality is increasing. - Bob Harris
Being on television makes you an "expert." People figure if you're on television you're there because you know something nobody else knows -- and when they've forgotten exactly what your supposed to know, they just assume that you know everything. - Lucianne Goldberg
The business of the journalist is to destroy the truth, to lie outright, to pervert, to vilify, to fawn at the feet of Mammon and to sell his country and his race for his daily bread. You know it, and I know it, and what folly is this toasting an independent press? We are the tools and the vassals of rich men behind the scenes. We are the jumping jacks. They pull the strings, and we dance. Our talents, our possibilities and our lives are all the property of other men. We are intellectual prostitutes. - John Swinden [before the National Press Club, 1953]
One day we will all wake up to the fact that our government's spin machine and printing presses have been used for the destruction of democracy and free enterprise. When we working stiffs wake up to this fact, it may be too late to save democracy. In all likelihood, it will be too late to opt out of paper into gold. Given the enormous levels of liquidity created by government printing presses, the price of gold could skyrocket to many thousands of dollars per ounce in a matter of days if not hours as millions of common folks suddenly realize our currency system is built on hot air, not real value. - Jay Taylor
The land of the free is gradually becoming the land of the unfree. There are Americans, you know, who don't believe in freedom -- at least not for others. We should never forget that humans are humans regardless of their nationality. There are always some people who have a terrible lust to control the lives of other people. Better to be free in a society with risks than a safe slave in a dictatorship. - Charley Reese
There is simply no evidence that the just-approved regulations for gun sales will do anything to reduce the deadly use of firearms. For the honest gun-buyer it would be just as effective to require that they register their silverware; for the rest it will simply mean buying from a burgeoning underground market.... the increase in murders in this country in the 1980s was entirely drug-related; for every other contributing factor the slay rate actually dropped. I once looked at the murder rate for DC in the mid-80s and found that if you weren't involved in buying or selling drugs, your chances of being murdered were about the same as if you lived in Copenhagen. - Sam Smith
I, for one, believe our federal government has already reached
the point of tyranny. It forcibly confiscates about 30 percent of
my income and redistributes it in ways never imagined when this
nation was founded on the principles of limited government and
self-government. Our elected and unelected leaders pay little
heed to the Constitution. They do what they want. Why? Because
they have force on their side. What gives them that force? Ultimately, it is superior firepower. - Joseph Farah
In the 1950s, you three times threatened nuclear strikes on China, and you could do that because we couldn't hit back. Now we can. So you are not going to threaten us again because, in the end, you care a lot more about Los Angeles than Taipei. - General Ji Shengde [January 1995]
I killed my first man at 18, a little more than 33 years ago. He looked even younger than me, caught wide-eyed in the blast of a left-to-right sweep of my Stoner machine gun, dancing like a puppet on a string before dropping to the ground. I walked over, looked at his lifeless face and then puked my guts out. Months of training could not overcome the horror that comes with taking another man's life, but -- as my training promised -- I would learn to deal with it. It was the last time I would get physically sick over killing, but it would not the last time I would kill. Over the next three years, I would kill many more men (and some women). Since it was all in the name of my country, and in a war far from home, the death and mayhem was sanctioned, applauded and rewarded by my government. I learned to deal with it, even live with it, but you never really get over it. Even when you kill for your country, a little bit of you dies each time you do it. - Doug Thompson
Such impudence. To unleash a war in a sovereign state without Security Council, without United Nations. It could only be possible in the time of barbarism. - Boris Yeltsin [May 5, 1999]
Three months after the American political system passed on an opportunity to dispose constitutionally of the most inept and corrupt president in American history the nation is engaged in a war that is provoking the Chinese to hostile actions and the emotionally unstable President Yeltsin to rave. I say it is about time we quit this war and divert our President's attention to matters less dangerous to our national security, for instance, his intern program. - R. Emmett Tyrrell, Jr.
Each day NATO kills three times as many civilians as were killed in Kosovo in the months prior to the bombing. - John Pilger
The death rate in Kosovo due to "genocide" during the period before NATO started bombing was roughly equivalent to the murder rate in DC during its late-1980s peak or about twice the current homicide DC rate. - Sam Smith
Two thirds of the world's fire power -- NATO's firepower -- cannot cope with Yugoslavia.... So what would they do with China, with India, with Russia or Indonesia or whatever other countries? ....morally, politically, they have been defeated. The problem is that they can't stop. - Mikhail Gorbachev
Now let's see if I understand this correctly. President Clinton has ordered our forces to engage an entrenched, politically motivated enemy, backed by the Russians, on their home ground, in a foreign civil war, in difficult terrain, with limited military objectives, with bombing restrictions, boundary and operational restrictions, queasy allies, far across an ocean, with uncertain goals, without prior consultation with Congress, having the potential for escalation, while limiting the forces at his disposal, and while the majority of Americans are opposed to, or are at best uncertain about, the value of the action being worth American lives. - So, what was it that Clinton was opposed to during Vietnam? - Lt. Gen. Tom Griffin (USA, ret.)
Clinton just keeps playing games with the truth. While he was saying he didn't "intend" to put troops on the ground in Serbia the Pentagon started slipping more troops into Europe and Macedonia, where one of our Army battalions, minus its tanks, is already dug in not far from where the bombs are bursting. The president sure has a way with words - "is" isn't "is", "sex" isn't "sex" and now "intend" really means "Welcome to Yugoslavia." - David H. Hackworth
The question may soon come down to what would be worse for America: A settlement that humiliates NATO by leaving Milosevic better off than he was and Kosovars immeasurably and irreparably worse off than they were? Or a ground war conducted by the NATO committee responsible for the misadventure so far, and in which the dominant nation's forces are commanded by overnight poll results masquerading as a president? - George Will
I wonder if NATO's leaders know that both of Milosevic's parents committed suicide when he was young? I wonder if NATO's leaders know that Slobodan's favorite uncle also committed suicide? Those who do know Milosevic say that his heart is as cold as stone. They say that he can't "quit" because that is what his parents and uncle did. If they are right, Milosevic will not give up. If they are right, NATO will have to invade Kosovo, kill everyone in Yugoslavia or give up. - John N. Doggett
With his popularity polls dropping almost as fast as military morale, Congress split on allowing him to continue his folly and the Air Force running out of bombs, Clinton has to find a way out of his bungled war. A "diplomatic settlement" could allow him to save some face. Some call it an exit strategy. We call it a lame attempt to save his ass. - Doug Thompson
Clinton was brave enough when sending ground troops to invade Haiti to win black votes; but when it comes to a real war to stop the worst crimes in Europe since Hitler, the sensitive, made-for TV president has shown himself vacillating and cowardly. Like the political jellyfish he is, Clinton has oozed in every direction over this war, talking tough to TV cameras while begging the Russians to pull his chestnuts out of the fire, and undermining the military efforts by loudly hinting at a deal with mass murderer Milosevic. - Eric Margolis
I was having a discussion about the Yugoslavia situation last week with a friend and his wife. His wife's position was essentially "Haven't you seen what is happening to those poor refugees from Kosovo? Milosevic is such an evil man. He has to be stopped. We have to send in ground troops and stop him now." I replied, "I agree that Milosevic is not a very nice man and that he is causing suffering and death for the people of Kosovo. But you think the United States should send in ground forces even though it is very likely that the loss of life will be great?" "Absolutely" she said. I then said "So you are ready to sacrifice Jennifer and/or Jason's life to stop Milosevic?" (Jennifer is her 17-year old daughter; Jason is her 15-year-old son.) "No, of course not." she said. "Well then," I replied, "just whose son or daughter are you willing to sacrifice for this noble cause?" She didn't say much after that but it was clear that she hadn't believed that her position to support ground troops would have any direct effect on her life. She didn't like being reminded that it could. It is easy to be brave with other people's lives and other people's money. - Arnie Rimmer
If we have a moral responsibility to fight every evil in the world, you'd better kiss your children goodbye and prepare for wars in Rwanda, Zaire, China, Russia, Croatia, Northern Ireland, South Africa, Turkey, the Sudan, Algeria, Kashmir, Angola, Sierra Leone and many other countries. Our volunteer military can't handle them all, encouraging a return of the draft.... so your children will be slogging through the mud of Europe, Asia, or Africa -- sleeping in filthy foxholes, risking their lives as they become hardened killers. Is that what you want? - Harry Browne
How could it happen that we are fighting on behalf of yet another
criminal operation? In no small part because for years American
journalists and other members of the establishment have turned
their back to the growing corruption of government and politics
by the drug cartels.... Those who have attempted to tell the
story have been fired, sued, ridiculed, blacklisted, harassed and
murdered. The reaction of those in the media and elsewhere in
power has been to ignore the blunt truth that an illegal industry
occupying nearly 10% of the nation's economy is going to buy
politicians and twist policy to its own interests just as much as
a legal industry of that size would.... George Walker Bush was
deeply involved in that criminal enterprise known as the Contras;
W.J. Clinton was raised in a mobbed-up family and himself became
closely tied to major drug traffickers. - Sam Smith
I'm increasingly less concerned about whether there will be true systemic problems. What I am concerned about are people's reactions to the fear that something momentous is going to happen on January 1st 2000... I'm sure that people will get very wise soon and recognize that the last thing you want to do is to draw inordinate amounts of currency out of the banks. - Alan Greenspan [May 6, 1999]
Oh, and the Fed-Gov will be announcing [that people should prepare for Y2K-induced losses of services for] 14 days, heard it at WDC Y2K in the back of the room where the known troublemakers hang out. - Cory Hamasaki
Italy is going to crash, and we are going to be crucified.... We are supposed to make things go so smoothly that nobody would realize there was ever a problem. Instead we will be the scapegoats. We have only consultative powers, and no one is listening to us. - Romano Oneda [Italy's Year 2000 Committee education expert]
I received this letter from my bank: "Your ATM card has an expiration date of 1999, and will no longer work after 12/31/99. Therefore, you will be receiving a new ATM card in the mail in two weeks ahead. The expiration date on your new card will be 12/49 (December, 2049)." Which will expire first? 1. My ATM card; 2. Me; 3. The banking system. Gentlemen, place your bets. (Credit cards and money orders are acceptable until 12/31/99.) - Gary North
The more important issue behind the Euro weakness is the dirty little secret that is being kept from the general media at all costs - the Euro clearing system still does NOT work! .... Between banks, all currency transactions settle at the end of every day. Euro settlements are also taking days. Banks in London are putting Euro checks on a 4-week clearing status. The net effect, many are starting to discount the Euro in order to accept it.... This is not such a good story for a currency that was going to knock the dollar off this planet. Most central banks are still unofficially not accepting Euros as a reserve currency, which has been told to us on a confidential basis. If publicly confronted on this issue, everyone would naturally deny it, but the failure of the Euro has been expressed in its near perfect swan dive since January 1st. - Martin A. Armstrong [Nick's comment: Yet, the Euro is largely a "success story", unlike Y2K in Europe, where work was deferred to get the Euro up and running.]
Y2k has evidenced the largest failure to meet a deadline in computer history and it has happened three times in a row. Remember 12-31-1998 with a year for testing? Now it is June 30th, 1999 with six months for testing. Soon it will be September 30th with three months for testing and then 12-31-1999 with three minutes for testing and a full year for spin control. - Doug McIntosh
Despite assurances by most large US-based companies that they will be ready for the century date change, very few were actually ready at the end of last year. According to the disclosure reports they filed with the Securities and Exchange Commission (SEC) during the fourth quarter of 1998, most large companies expect to be done with their Y2K projects sometime during the second half of 1999. The data provided by the largest companies suggest that they were just halfway through their projected Y2K budgets at the start of this year. Even more disturbing is that a March 1999 survey of 1,600 large Canadian companies found that only 18% expected to be ready at the end of April. Last May, this same survey found that 15% reported that they were ready at that time for Y2K. Is it possible that the proportion of large companies that are prepared for the century date change increased by only three percentage points in the past year in Canada? If so, are the Canadian results a good proxy for the situation in the United States? I suspect so, especially since Canadian company managers have been at least as aware and alarmed about Y2K as their American counterparts. - Ed Yardeni
While attending a collectibles show on the East Coast over the
weekend, at dinner I happened to be sitting beside the wife of
the head of the entire Y2K program for a major New York money
center bank... Upon learning what her husband's position is,
someone else at our table said, "I'm very concerned about Y2K; in
fact, I intend to withdraw a considerable amount of my money from
the banks this fall." To which the lady replied, "Oh, I've already done that!" ....I said to the lady, "You're telling us that
your husband is in charge of a major bank's Y2K code remediation
project and that you.... are taking your assets out of the system?" At this she took alarm and would not discuss it further. I
think she realized she had let something slip out that should not
have. - Cody Varian
How droll. The politicians continue on, totally clueless to the approaching enormous discontinuities of a stock-market meltdown and the Y2K computer problems. More likely, in the fall of 2000, the public will be so enraged at the loss of its paper "wealth" in the crash, and at the "instant" and ongoing depression that the worldwide failure to fully fix Y2K will have created, that they will strike out and remove from office anybody (Democrat, Republican or whatever) connected with the old, failed régime.
A year and a half ago, it seemed unlikely to me that the meltdown and Y2K economic disruptions would occur more or less at the same time; for sure, I felt, the stock market would go first. But the Federal Reserve (and central bankers generally) have been remarkably successful at reflating. A truly free stock market (no governmental intervention) would have crashed in October 1997 with the onset of the Asian asset deflation. Second chance to crash came in September/October 1998 with the collapse of Long Term Capital Management; but again, the reflation succeeded, this time with a vengeance.
With the (at least intermediate-term) recent highs in the big-cap stocks now behind us, and "Timer's Trend" again on a sell signal, the next likely period for a market meltdown to occur is mid- to late July. Question is, when the next meltdown attempt by stocks is imminent, will the Federal Reserve again move to reflate? After all, the autumns of 1997 and 1998 near-meltdowns were triggered by external events, events which central bankers are "supposed" to rectify - currency/credit collapses in 1997, and a derivatives failure in 1998 which threatened to bring down the entire international monetary system. Today, the conventional wisdom is that the Asian economies have bottomed and are on the road to recovery, and that problems with derivatives can be successfully managed.
So, the next flirtation with meltdown could simply appear "by itself" (that is, as a result of psychological exhaustion) without the usual suspects as triggers.... and might not the Federal Reserve simply let it happen this time, since no central-bank issues are involved, so it will be blameless? I think not, simply because people expect that the Fed will never let stocks crash (as they believed in 1929), and even if there are no problems currently within the central banks' purview which will appear to have caused the crash, the meltdown alone, if "allowed" to proceed unchecked, would rapidly spread to the banking and credit system.
Therefore, I would expect the Fed to again step in and attempt to engineer a snapback. Success is not guaranteed, but their record is now 2-for-1 (1997 and 1998 versus 1987), so I'm prone to tilt the odds slightly in their favor and say they can do it a third time, too.
Should a stock-market meltdown not threaten in July (major tops can sometimes take a very long time to complete, after all), the next window of opportunity will be in late September to early November, the traditional time for crashes. By this time the public should be sufficiently aware of the failure to fully fix Y2K that the Fed is not guaranteed success when it tries to reflate stocks. But even if we pass through this window of opportunity with no meltdown, and with big-cap stock prices still in the ionosphere, the market bubble cannot survive for more than a few weeks into 2000 as the Y2K failures (especially within government and from overseas) drag the economy into recession.
As in 1929, a stock-market crash alone is sufficient to throw the economy into recession or depression. The worldwide failure to sufficiently remediate the Y2K software and embedded-systems bugs alone is enough to send the economy into recession, and possibly a depression, depending on what didn't get fixed. Should Y2K be the "trigger" that collapses stocks, I think we will be very fortunate if we escape with only a bad recession. The enormous psychological shock.... going from the anticipation of a bright new millennium to the reality of Y2K-induced shortages, job losses and interruptions and shrinking trade, on top of which is overlaid a collapse in the values of paper assets.... argues for a more severe economic downturn; "instant depression", as it were.
Believe me, I would like to say it won't be so. I am not naturally a pessimist (though I do tend to be cautious), but I call them
as I see them, and I still see lots of trouble ahead. I look
forward to the day when stocks return to earth and one can again
invest for the long term with confidence, not just play momentum-chasing guessing games with the money managers. After all, the
leverage is much better on the upside, and riding a bull market
is a lot more fun than scraping by and trying to survive during
hard times.
Original cost: $ 8,090.45
Present value: $ 5,807.14
Increase: $-2,283.31 [-28.22%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is -18.61%, for a compound annual rate of return of -1.63%. COMMENT on "Phoenix": No change from the last issue. (Cash balance is not up to date.)
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $ 8,675.00
Present value: $ 7,724.64
Increase: $ -950.36 [-10.96%]
COMMENT on "PIG": The PIGs' Web page is at
http://www.assumption.edu/HTML/Faculty/Kantar/WPigs.html
C. Roth rollover IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $11,130.90
Increase: $ 2,804.71 [+33.69]
The performance of this portfolio (including its predecessors)
from January 1, 1987 to the present is 1.49%, for a compound
annual rate of return of 0.11%.
D. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar1992 stock @ 56.65 MM @ 13.41
29Apr1992 MM @ 13.48 bond @ 31.19
19Jun1992 bond @ 32.14 MM @ 13.55
29Jun1992 MM @ 13.57 stock @ 56.74
24Jul1992 stock @ 56.76 MM @ 13.61
29Oct1992 MM @ 13.72 stock @ 58.61
23Dec1992 stock @ 61.48 MM @ 13.78
16Jan1995 MM @ 14.83 equity-index @ 26.44
20Jan1995 eq-index @ 26.19 MM @ 14.84
30Oct1997 MM@ 17.24 bond@47.56 (27.17%)
30Oct1997 MM@ 17.24 i-i bond@26.12 (27.17%)
11Feb1998 bond@ 48.84 MM@17.52 (27.17%)
11Feb1998 I-I bond@ 26.23 MM@17.52(27.17%)
16Jun1998 MM@ 17.84 TIAA Traditional (45.87%)
Values, 28May1999: stock, 177.79; MM, 18.70; bond, 51.48;
inflation-indexed bond, 27.48; TIAA current yield in SRA, 6.00%
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%
Gain, January 1 through December 31, 1998: 5.72% (5.72%
annual rate of return)
Total gain since January 1, 1988 (11 years): 174.03%
Compound annual rate of return: 9.60% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained
442.42%, for a compound annual rate of return of 16.62%.
E. Current unfilled portfolio good-til-cancelled orders: None.
COMMENT on "Timer's Trend": We're on a SELL signal generated May 25, and on crash watch, with mid- to late July the next likely time for the crash (attempt).
______________________________ TIMER'S TREND _________________________________
Mon 19 Oct 98 . | #. | 8466.45 |-. *
Tue 20 Oct 98 . | # | 8505.85 |+. *
Wed 21 Oct 98 . #| . }| 8519.23 |+. *
Thu 22 Oct 98 . |# . | 8533.14 |+. *
Fri 23 Oct 98 .# | . | 8452.29 + . *
Mon 26 Oct 98 . |# . | 8432.21 + . *
Tue 27 Oct 98 . # . | 8366.04 |-. *
Wed 28 Oct 98 . |# . | 8371.97 + . *
Thu 29 Oct 98 . | # | 8495.03 + . *
Fri 30 Oct 98 . | . # | 8592.10 | + *
Mon 2 Nov 98 . | . # | 8706.15 | + *
Tue 3 Nov 98 . | # | 8706.15 | .+ *
Wed 4 Nov 98 . | . # | 8783.14 | . + *
Thu 5 Nov 98 . | .# | 8915.47 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 6 Nov 98 . | # | 8975.46 | . + *
Mon 9 Nov 98 . # . | 8897.96 | .+ *
Tue 10 Nov 98 . # . | 8863.98 | + *
Wed 11 Nov 98 . |# . | 8823.82 |+. *
Thu 12 Nov 98 . |# . | 8829.74 |+. *
Fri 13 Nov 98 . | # | 8919.59 |+. *
Mon 16 Nov 98 . | # | 9011.25 |+. *
Tue 17 Nov 98 . | #. | 8986.28 | + *
Wed 18 Nov 98 . | #. | 9041.11 | + *
Thu 19 Nov 98 . | # | 9056.05 | + *
Fri 20 Nov 98 . | . # | 9159.55 | .+ *
Mon 23 Nov 98 . | . # | 9374.27 | .+ *
Tue 24 Nov 98 . | #. | 9301.15 | .+ *
Wed 25 Nov 98 . | # | 9314.28 | .+ *
Fri 27 Nov 98 . | .# | 9333.08 | .+ *
Mon 30 Nov 98 .# | . | 9116.55 | + *
Tue 1 Dec 98 . |# . | 9133.54 |+. *
Wed 2 Dec 98 . # . | 9064.54 |+. *
Thu 3 Dec 98 . #I . | 8879.68 + . *<
Fri 4 Dec 98 . | . # | 9016.14 + . *
Mon 7 Dec 98 . | # | 9070.47 |+. *
Tue 8 Dec 98 . |# . | 9027.98 |+. *
Wed 9 Dec 98 . | #. | 9009.19 | + *
Thu 10 Dec 98 .# I . | 8841.58 |+. *
Fri 11 Dec 98 # I . {| 8821.76 + . *
Mon 14 Dec 98 # . I . | 8695.60 | - *
Tue 15 Dec 98 . #I . | 8823.30 | - *
Wed 16 Dec 98 . #I . | 8790.60 | .- *
Thu 17 Dec 98 . I# . | 8875.82 | - *
Fri 18 Dec 98 . I# . | 8903.63 | - *
Mon 21 Dec 98 . I # | 8988.85 + . *
Tue 22 Dec 98 . #I . | 9044.46 + . *
Wed 23 Dec 98 . I .# | 9202.03 |+. *
Thu 24 Dec 98 . I .# | 9217.99 | + *
Mon 28 Dec 98 . I# . | 9226.75 | + *
Tue 29 Dec 98 . | # }| 9320.98 | + *
Wed 30 Dec 98 . | #. | 9274.64 | + *
Thu 31 Dec 98 . | . # | 9181.43 | .+ *
Mon 4 Jan 99 . | # | 9184.27 | .+ *
Tue 5 Jan 99 . | . # | 9311.19 | .+ *
Wed 6 Jan 99 . | . # | 9544.97 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 7 Jan 99 . |# . | 9537.76 | . + *
Fri 8 Jan 99 . | .# | 9643.32 | . + *
Mon 11 Jan 99 . # . | 9619.89 | .+ *
Tue 12 Jan 99 .# I . {| 9474.68 | + *
Wed 13 Jan 99 # . I . | 9349.56 |-. *
Thu 14 Jan 99 # . I . | 9120.93 |~-~~*~~~~~~~~~~~~~~~~~~~~~~~
Fri 15 Jan 99 . I . # | 9340.55 | - *
Tue 19 Jan 99 . I #. | 9355.22 |-. *
Wed 20 Jan 99 . I #. | 9335.91 |-. *
Thu 21 Jan 99 .# I . | 9264.08 + . *
Fri 22 Jan 99 # I . | 9120.67 + . *
Mon 25 Jan 99 . & . | 9203.32 |-. *
Tue 26 Jan 99 . & . | 9234.58 |-. *
Wed 27 Jan 99 .# I . | 9200.23 | - *
Thu 28 Jan 99 . & . | 9281.33 |-. *
Fri 29 Jan 99 . I# . | 9358.83 |-. *
Mon 1 Feb 99 . I# . | 9345.70 + . *
Tue 2 Feb 99 # I . | 9274.12 |-. *
Wed 3 Feb 99 . I# . | 9366.81 + . *
Thu 4 Feb 99 # I . | 9304.50 |-. *
Fri 5 Feb 99 # I . | 9304.24 | - *
Mon 8 Feb 99 # I . | 9291.11 | .- *
Tue 9 Feb 99 # . I . | 9133.03 | .- *
Wed 10 Feb 99 # I . | 9177.31 | . - *
Thu 11 Fab 99 .# I . | 9363.46 | . - *
Fri 12 Feb 99 # . I . | 9274.89 | . - *
Tue 16 Feb 99 .# I . | 9297.03 | . - *
Wed 17 Feb 99 # . I . | 9195.47 | . - *
Thu 18 Feb 99 .# I . | 9298.63 | . - *
Fri 19 Feb 99 .# I . | 9339.95 | . - *
Mon 22 Feb 99 . I #. | 9552.68 | - *
Tue 23 Feb 99 .# I . | 9544.42 | - *
Wed 24 Feb 99 # I . | 9399.67 | - *
Thu 25 Feb 99 # . I . | 9366.34 | .- *
Fri 26 Feb 99 #. I . | 9306.58 | .- *
Mon 1 Mar 99 #. I . | 9324.78 | . - *
Tue 2 Mar 99 # I . | 9297.61 | . - *
Wed 3 Mar 99 # I . | 9275.88 | . - *
Thu 4 Mar 99 . & . | 9467.40 | .- *
Fri 5 Mar 99 . I . # | 9736.08 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 8 Mar 99 . I #. | 9727.61 + . *
Tue 9 Mar 99 . #I . | 9693.76 + . *
Wed 10 Mar 99 . I# . | 9772.84 |+. *
Thu 11 Mar 99 . |# . | 9897.44 |+. *
Fri 12 Mar 99 . #I . | 9876.35 + . *
Mon 15 Mar 99 . & . | 9958.77 + . *
Tue 16 Mar 99 . #I . | 9930.47 + . *
Wed 17 Mar 99 .# I . | 9879.41 |-. *
Thu 18 Mar 99 . I# . | 9997.62 |-. *
Fri 19 Mar 99 # I . | 9903.55 |-. *
Mon 22 Mar 99 # I . | 9890.51 | - *
Tue 23 Mar 99 # . I . | 9671.83 | .- *
Wed 24 Mar 99 # I . | 9666.84 | . - *
Thu 25 Mar 99 . & . | 9836.39 | . - *
Fri 26 Mar 99 # I . | 9822.24 | . - *
Mon 29 Mar 99 . I# . |10006.78 | .- *
Tue 30 Mar 99 #. I . | 9913.26 | - *
Wed 31 Mar 99 #. I . | 9786.16 | - *
Thu 1 Apr 99 .# I . | 9832.51 | .- *
Mon 5 Apr 99 . I #. |10007.33 | - *
Tue 6 Apr 99 . #I . | 9963.49 | - *
Wed 7 Apr 99 . #I . |10085.31 | - *
Thu 8 Apr 99 . I# . |10197.70 |-. *
Fri 9 Apr 99 . I #. |10173.84 + . *
Mon 12 Apr 99 . | #. |10339.51 +~.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 13 Apr 99 . |# . |10395.01 |+. *
Wed 14 Apr 99 . | #. |10411.66 |+. *
Thu 15 Apr 99 . |# . |10462.72 |+. *
Fri 16 Apr 99 . | # }|10493.89 |+. *
Mon 19 Apr 99 . | # |10440.53 | + *
Tue 20 Apr 99 . |# . |10448.55 | + *
Wed 21 Apr 99 . | .# |10581.42 | + *
Thu 22 Apr 99 . | .# |10727.18 | .+ *
Fri 23 Apr 99 . | # |10689.67 | .+ *
Mon 26 Apr 99 . | .# |10718.59 | .+ *
Tue 27 Apr 99 . | # |10831.71 | .+ *
Wed 28 Apr 99 . | # |10845.45 | + *
Thu 29 Apr 99 . | # |10878.38 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 30 Apr 99 . | #. |10789.04 | + *
Mon 3 May 99 . | . # |11014.69 | .+ *
Tue 4 May 99 . | # |10886.11 | .+ *
Wed 5 May 99 . | .# |10955.41 | .+ *
Thu 6 May 99 . | #. |10946.82 | .+ *
Fri 7 May 99 . | .# |11031.59 | .+ *
Mon 10 May 99 . | .# |11007.25 | .+ *
Tue 11 May 99 . | . # |11026.15 | .+ *
Wed 12 May 99 . | # |11000.37 | .+ *
Thu 13 May 99 . | .# |11107.19 | . + *
Fri 14 May 99 # . | . |10913.32 | + *
Mon 17 May 99 # I . |10853.47 + . *
Tue 18 May 99 . #I . |10836.95 |-. *
Wed 19 May 99 . & . |10887.39 | - *
Thu 20 May 99 . | #. |10866.74 | - *
Fri 21 May 99 . |# . |10829.28 |-. *
Mon 24 May 99 .# I . |10654.67 + . *
Tue 25 May 99 # . I . {|10531.09 |-. *
Wed 26 May 99 . & . |10702.16 |-. *
Thu 27 May 99 .# I . |10466.93 |~-~~*~~~~~~~~~~~~~~~~~~~~~~~
Fri 28 May 99 . I# . |10559.74 | - *
========================================================================
"Timer's Trend" is based on 4% and 10% exponential moving averages of the New York Stock Exchange advance/decline line (that is, the ratio of advancing to declining stocks). There are many symbols shown above, but the ones that count are the braces: {, } = "Timer's Trend" (4% exponential confirmed by 10% exponential) SELL ({) or BUY(}) signal.
NEXT ISSUE - will appear about June 23.
/Nick Chase