The Contrarian's View

Vol. XIII, #11, June 23, 1999

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

GAME NEARLY OVER!

This Gallup poll was paid for by the U.S. government's banking regulatory agencies. I'll bet they wish they hadn't.

Let me give you the big news up front:

"With respect to public response to Y2K threats, nearly half (47 percent) consider it likely that people will panic and withdraw all their funds prior to year's end, compared to 37 percent who consider it unlikely"....

This was March, 1999, before things really get rolling, before the bankers run out of compliance deadlines that are just around the corner, Real Soon Now, before TV clips show a million Japanese housewives standing in lines in front of their banks. Half the U.S. public thought that there will probably be bank runs by December: withdrawal of all of people's money -- not 72-hour weekend party money. I would call this a well-primed audience: 47 million households think their next door neighbors will go down and get 100% of their money out of the banks.

If this statistic does not produce damp shorts in the boardrooms of the New York banks, then the board members are brain-dead. But it gets worse:

"Barely one respondent in five believes that the entire banking system will be forced to shut down by computer problems"....

I love that: "barely one respondent in five." Let that one sink in, folks. 20% of Americans say that they think the entire banking system will be shut down in January. Barely? BARELY??? If 20% of the public thinks this in March, we are going to have an interesting Christmas.

The spinmasters have their work cut out for them. I think Koskinen will let this one pass. "It's in Greenspan's end of the court."

The poll was 2,600+ people -- a large poll, at least 1,100 over the industry standard of 1,500, thereby lowering error rates to below 3%. There are about 100 million households in the United States. These 2,600+ represent their opinions statistically.

Important findings on the media: 80% of those polled had heard of y2k, but only half had heard a great deal about it. About 46% had heard something about banking and y2k. (And 47% thought there will be runs -- an interesting correlation that the Gallup folks did not mention.) Of these 46%, 36% got their news from TV, 32% from newspapers, and 7% from the Internet. Thus, the mainstream media have provided two-thirds of the better-informed public that knows about y2k and banking with whatever these people know about the topic. The Internet was not a factor, and newsletters were not on the public's radar. Thus, if bank runs are a self fulfilling prophecy -- and bad code is nothing crucial -- then the mainstream media should be blamed if the runs happen.

I blame bad code and fractional reserves, but I'm on the Internet. What can you expect?

The public has heard almost nothing about y2k from their banks. This means that the banking industry is dependent on outside information sources for the opinion of its depositors. This is bad news for banks if the media ever discover that y2k bank run stories gain big audiences. (If!!!)

Now, I don't want you to imagine that there was any bias in the Gallup Organization's reporting. I can't imagine that the following use of adjectives in any way reflects bias:

"In addition, survey data suggests that those with more exposure to Y2K issues (more information) are more likely to be planning to take rational and prudent precautions and less likely to be planning to take drastic steps to prepare for Y2K."

Rational and prudent precautions vs. drastic steps: yes, that's certainly neutrality in action.

Most people think the problems will last only briefly. Most people also haven't a clue about fractional reserve banking. If today's scared ones -- 47% -- take all their money out for the weekend -- which is what they think everyone else will be doing - then the banks will be in bankruptcy by January 1. This is irrespective of foreign bank runs and cascading cross-defaults among banks.

The Gallup authors think the following is good news for banking:

"The first quarter of 1999 saw the publication of more and more frequent feature articles across all media (including mass communications) suggesting that public panic behavior about Y2K problems is a considerably greater threat to social and economic systems than that posed by the possibility that some systems will not be fully remediated by December 31, 1999."

So, the media are telling people that public fear is the big threat. That message will be believed. When the first signs of the bank run mania hits, millions of Americans will take action. "If people are getting scared now, then I'd better get my money out before the banks close." This message -- "the code is OK, but people are the threat" -- is perfect for creating mass panic. It sets up depositors not to pay any attention to the banks' assurances that they are compliant. "Who cares if you're compliant? My next door neighbor has pulled out his money, and I want mine. Give me my money!" These are the four most terrifying works in the bank industry.

This is more good news, Gallup style:

"Eighty-six percent of respondents expect to confirm their account balances before year's end, with 57 percent indicating they would definitely take this step and only a combined 9 percent indicating that it was unlikely that they would do it. Seventy eight percent said they will keep better track of bank transactions, with nearly twice as many indicating "definitely" as "probably." Only 15 percent of depositors felt it unlikely they would take this precaution. Eighty-two percent of respondents expected to continue their usual banking routines at year end ­ with responses evenly split between those who reported "definite" and "probable" intentions. Fifty-nine percent thought it likely that they would discuss Y2K readiness with bank staff, again with the percentages evenly split with respect to the firmness of intent"....

Don't these poll-takers understand what this means? If 59% of depositors start asking questions, October-December, the banks' phone lines will jam up. That is 59 million heads of households, all calling their bankers or going down to talk with some nicely dressed, poorly paid lady at the bank.

Want to terrify bank depositors? Give them a busy signal. So, they'll go down in person. Fifty-nine million frightened account holders all trying to get straight answers from frantic tellers in the middle of media reports on foreign bank runs. They were already spooked in March. Now they all go down at once to get the facts. You know what's next. "As long as I'm here anyway, give me my money!"

Fifty-nine million people lining up to have a chat with a teller. I would call that an irresistible TV crew opportunity. "Live at 11!" All in time for Christmas. (I can see Alan Greenspan in a Santa suit, sitting at the front of the line, with a bucket of newly printed $100 bills next to him. Depositor after depositor gets to sit on his lap. "Have you been a good little entrepreneur this year? Well, Santa has some preliminary returns for you! Merry Christmas! Ho, ho, ho.")

There will be few ho, ho, ho's in the boardrooms this month.

I suggest that you think through what you are about to read: 47 million Americans think there will be bank runs. They are taking a wait-and-see attitude. But they are spooked, big-time.

Did you see "City Slickers"? Do you remember the scene when Billy Crystal turns on the battery-operated coffee bean grinder? Do you remember what happens next? I suggest that you wake up and smell the coffee. Early.

You're on the Internet. You have a head start. A word to the wise is sufficient.

I loved the lead paragraph of a brief story on this report in the WASHINGTON POST (June 15). The Beltway spin begins:

A survey sponsored by four federal agencies found that a quarter of the people polled said they had received information on the year 2000 computer glitch from their banks or other financial institutions. Three-quarters, though, believed that their bank would "definitely"or "probably" solve the Y2K problem before year's end.

Frankly, I was surprised at the poll results, because the banks (in this country), like the insurance companies and Wall Street, are the furthest along in their Y2K repairs, and are likely to be almost fully compliant by next January 1. I expect the problems in the U.S. banking system to come, not from large computing systems failing to properly execute and record financial transactions, but from asset risk - a 10% or more sudden increase in banks' nonperforming loans as the Y2K mess drives the economy into recession and unprepared companies (and countries) into bankruptcy ; and from systemic risk - such as derivatives failures because risk margins rise sharply.

But the evil nature of fractional-reserve banking is, after all, that it's a confidence game; it works because only a small percentage of depositors want their money back at any time. If people lose confidence in the ability of the system to deliver their funds on demand (as the Gallup poll would seem to indicate), then the seeds for panic have been sown, regardless of how successfully the remediation is going in the banking world. Bank runs are not guaranteed to occur at year's end, of course, but the public's attitude indicates the odds of such runs are greater than at any time since the Great Depression.

My own opinion is that betting that the banks will fail (for Federally-insured deposits) is equivalent to betting that the U.S. government will go under. (For Gary North, a hoped-for outcome!) Even though "reserves" are only a tiny fraction of deposits, the Federal guarantee essentially backs your funds with the power of the U.S. Treasury and the money-printing presses of the Bureau of Engraving and Printing. If your bank goes under, you will get your money back, though you may not get it back just when you want or need it.

So I see no real risk to leaving your money in the bank other than (temporarily) not having access to it. Having enough cash on hand to see you through the rollover period would seem wise; savings not needed for immediate use should be as safe and sound as the government itself. (Hmmmm.... maybe I should rephrase that.)

If the Federal Reserve and banking officials detect a whiff of panic, you are likely to see those restrictions which appear in fine print, but are seldom used and virtually unknown to the public, come into play - such as a waiting period, and written notification to the bank, before you can withdraw from savings accounts or accounts other than checking ("demand" accounts).

Nevertheless, it would seem the public generally is not as optimistic as I am about the banks' Y2K-readiness in January 2000. Partly, this is the regulators' fault, because they keep everybody in the dark about the true state of progress and issue only deliberately vague and generalized statements - promises, actually - about how everything will be fixed in time. If they issued "warranties" (similar to TIAA-CREF's) for individual banks, or if banks could issue their own certified-internally-compliant statements without fear of legal hassles, then market forces would solve the problem; depositors would move their funds to Y2K-safe banks, and the others would fold. But, in lieu of meaningful information, it's no wonder the public is suspicious of vague assurances from the same outfit whose boss is that paragon of truth, Bill Clinton, and which gave us Vince Foster's "suicide in the park" and the TWA 800 "center fuel tank explosion".

When all is said and done, you should do what you feel comfortable with. It's not the government's money; it's not the bank's money; it's your money that's at risk. If you do decide to panic, do it now; don't wait until December when the odds of public panic will rise sharply.

One thing the poll left unsaid, because it didn't cover the subject: What will people do about money they have in the stock market? For a significant minority of Americans to expect a bank panic (even if it's only their neighbors panicking, not themselves) and to not, in turn, expect a similar panic to sell stocks, would certainly be one of the great disconnects of all time. Can we presume a similar percentage also expect stocks to crash, and would have said so if asked? I think so..... and could this expectation become self-fulfilling? I guess it depends, ultimately, on how many people act on their fears come December. (Especially since stocks are virtually guaranteed to crash in the first few weeks of 2000, if they haven't already done so before.)

Appended to this month's issue of The Contrarian's View are some of the figures from the Gallup report; the full report can be found on the Internet at http://www.fdic.gov/banknews/fils/1999 /Y2Ksurveyreport.pdf.

Grade Time

The report shows significant progress in most areas.... but see what the "grades" really mean: The primary determinant of grades is mission-critical systems ­ specifically, the estimated completion date based upon the agency self- reported current rates of progress.

Finishing before the OMB deadline of March 31, 1999 earned a base grade of A. Finishing in the year 2000 or 2001 is a base grade of C. 2002 is a base grade of D. And, anything over 2002 is an F. My own opinion is, if they're not done by early 2000, they should get an "F".... the only meaningful grades are "A" (ready) and "F" (not ready, the mission fails); the rest is spin.

Greedy and Stupid
by Paul Milne

It is human nature. People are basically greedy and stupid. When prices are very low, they do not want to buy, even though that is the best time. No, they do not buy as the market begins to move up. But they do rush to buy when it is skyrocketing because they think it will go higher forever and they are insanely jealous that 'everyone' else is getting a piece of it and they are not. Some of them take a chunk and get out with great profits. The OVERWHELMING majority get wiped out.

Like clockwork.

Same thing is happening right now in the equities markets. Going into the peak, wherever that may be, the masses rush in. The masses are ALWAYS wrong in this regard. They drive it up to insane levels, not because there is any rational reason for prices to be at that level, but rather, only because prices go much higher because there is always a bigger fool out there to pay more for it. It feeds itself. And you recognize that when anything 'feeds' itself' it is also 'consuming' itself. Try eating your arm, starting with your fingers and see how long you live

Over the short haul, as it is going higher, all the asinine Pollyannas gloat about the fact that it has not yet cracked and they are making money hand over fist. Most of them are not making one thin dime because they have not yet liquidated.

And then, one day....your fault, my fault, no one's fault at all... Bang. It corrects. And at nosebleed levels like this or at some point very soon, the correction gets way out of hand. Panic ensues.

The equities markets are in far far different shape than they were in the twenties. They are in far far WORSE shape. When it goes this time, it will make the great depression look like a week in Disneyland. So why is it still going higher? Simple. The greed has not yet been satiated. And they will all, magically, say exactly the SAME thing that I have heard countless times. "How could such a great situation turn so bad so fast. I'm ruined!"

Won't be long now.

Funny side note: My grandfather's business on Wall Street was wiped out in 1929. A broker landed right on his pushcart.

Reality Will Prevail
by "Anonymous" (posted on Gary North's web site)

The company was developing a product that was rather impressive, the PR going out even more so. Customers and shareholders alike were awaiting the release with great anticipation. Wall Street analysts were anticipating a large increase in share prices when the first shipments were announced. Lots of folks, including myself, were on teams developing the product and the sub-systems necessary to support its production. The sales force had determined a product window during which the product had to be introduced or we would start losing market share. It was an aggressive time frame, but the customers had been informed that we were ON TRACK to make the promised release date. There was one little problem, however. The team that originally came up with the product idea and performed the basic research had told upper management that the development time would take approximately three times longer than the market window allowed. We couldn't possibly get it developed and manufactured in time. What to do?

Well, since the product was extremely complex (lots of hardware and software), it was decided to release it in stages. Early versions would have limited capabilities which would be added to as development and refinement continued after initial release. Later products would incorporate these functions as standard features. To accomplish this, the product development milestones were assigned to appropriate stages of release. For example, a simple function would be assigned to the initial release phase (Phase One), while a more complicated (read, "very time-consuming to develop") one would be scheduled for a later release (Phase Three or Four). Thus, each level consisted of a defined set of functions which was agreed to in advance by everyone, including the programmers and engineers who had expressed their concerns but eventually acquiesced for the sake of continued employment.

Here's where it got interesting. The person in charge of ensuring the milestones were met (he used to be my boss) would often have the developers coming into his office announcing that they wouldn't be able to reach a milestone in time. His solution was elegant. "No Problem! We'll just take that function off of Phase One and move it over to, oh, let's say, Phase Three. Is Phase Three good for you? It is? Oh, OK. Can't have bad news going up the chain, you know. Bad for the career. Thanks for dropping in, keep up the good work...."

There was one small problem with this approach, though. He never got around to telling anyone above him that he had effectively redefined the functionality of each of the phases. The bad news never went up the chain, and the people at the top never came down to see for themselves that the good news was accurate. They were still going along on the assumption that the previously agreed on definitions of product functionality hadn't changed.

Well, some months later the CEO made a public announcement that the product was 90% done and would be ready for shipment REAL SOON NOW. People cheered. Dogs howled. Bands played. Flags flew proudly in the sun. Investors danced with glee. The stock soared. Several company officers exercised their sizable stock options and made a killing.

Meanwhile, back in the trenches, we looked at each other in stunned disbelief. We had not even achieved one of the most fundamental milestones for the first release phase. We knew we had at least a year's worth of work ahead of us before a viable product could be ready for shipment. We had been telling this to our managers in our status reports - where had the disconnect occurred? What would the shareholders and customers do when the truth came out? What would become of the product? What would become of us?

To make a long story short, reality prevailed.

The first version of the product didn't ship for another year. The stock price collapsed. Business dropped off. The development teams works lots of unpaid overtime. Everyone in the company had their salary cut by 5-10% (the alternative was a layoff during a recession). The investors and shareholders filed a class action lawsuit. The SEC got involved. The company's reputation suffered. Customers went elsewhere.

A consultant was brought in to help determine where we had failed. After looking at all the records, he estimated that the development time needed was three times longer than the release schedule the PR folks had publicly broadcast (so as not to miss the market window). He was paid his rather substantial fee and quietly escorted out the door.

Several of the company officers who had profited handsomely from the stock's rise were investigated by the SEC. The company paid for their legal representation. (Some of my friends who were much lower down the food chain, and weren't aware of what was happening, were also investigated. They had to pick up the tab for their lawyers. Their legal bills eclipsed any profits they made from exercising their meager stock options.) The lawsuit's basic premise was simple - either: 1) the corporate officers were not aware of the actual situation, and were therefore negligent; or 2) they were aware of the true situation and had covered up the facts in order to profit personally, and were therefore guilty of insider trading.

Eventually the company settled with the investors and shareholders out of court - and out of the company's coffers. The product started selling like hot cakes and profitability was eventually restored. None of us ever had our salaries re-adjusted to compensate for the pay cuts. As far as I know, no corporate officer was ever fined or prosecuted further.

What ever happened to the program director who played "shuffle the milestones" so well? He was promoted.

Whenever I think of Y2K and all of the self-reported data coming out, I'm reminded of this event. It wasn't fun and I don't see any reason why it can't be happening to some extent, somewhere, right now.... bad news gets fired, good news gets promoted. Don't think it isn't true, I've seen it first hand.

I honestly don't know what Y2K will bring because it's so tough to get accurate data from which to decide a course of action. But after being in high tech for over 20 years and seeing scenarios like this one played out time and again, I'm not optimistic. I'm playing it safe.

Reality will prevail.

OK, Who Won the War?

Now that the bombing has stopped, NATO is to be permitted free run of Kosovo, but not Serbia; and Kosovo is to be autonomous, but there will be no vote for independence.... both being conditions agreed to by Milosevic pre-war. Seems to me, it's NATO that backed down. Tell me again, what was all that bombing for?

I don't see any "winners" in this war, despite any claims of "victory"; everybody lost. The situation is immeasurably worse. Yugoslavia has nominal control of Kosovo, but in reality the KLA is running amok (while NATO forces attempt to assert their dominance), "ethnically cleansing" any remaining Serbs foolish enough not to make a beeline for Serbia proper. Russian forces are on Yugoslav soil and are carving out their own zone of occupation, something Tito spent a lifetime trying to prevent. Those ethnic-Albanian refugees who choose to return home are finding mostly devastation; many never will go back because they don't trust NATO to keep the province safe for them. Serbia, economically, has returned to the 1960s. The "butcher of Belgrade" remains in power, just as we left the "butcher of Baghdad" in power following the Gulf war. U.S. troops look like they're headed for an indefinite stay (in addition to Bosnia), and I wouldn't be surprised to see a boatload of our tax dollars being shipped to the region to rebuild what we just spent a boatload of our tax dollars to destroy.

This is one of those cases, I think, where diplomacy should have succeeded, but failed. If I had the power, in the blink of an eye I would fire the people in our government who have created this mess.

QUOTES FOR THE MONTH

The US, right now, is the centre of global capitalism, and if the centre collapses, the world system could collapse. And the situation in the US is not sustainable.... Last year, I think we were on the verge of collapse. I remember Larry Summers saying to me, `The world is collapsing'.... The basic problem of this globalised and virtualised economy has not been overcome, so it may recur. And that is huge amounts of money, highly leveraged, moving across borders very quickly... Lots of money has flowed into the US since 1997.... But if that flows out again in a rush, they could have a major problem. - Eisuke Sakakibara [Vice-Minister for International Affairs, Japanese Ministry of Finance]

[W]hat do derivatives have in common with the plight of refugees in the Balkans? We would argue that the two are inextricably linked by a mindset that believes all risk can be hedged. In effect there is no conception of fear. Risk has been abolished courtesy of the Federal Reserve, the real counterparty to all these derivatives. This "too big to fail" policy allows uneconomic enterprises to continue in business, it matters little if they are companies or countries.... The Federal Reserve can only get away with this because the U.S. is the world's lone superpower. This supports the reserve currency status and despite, or rather because of, the yawning trade deficit domestic US prices remain stable. The implication is that the Kosovo situation is a political example of the same "too big to fail" doctrine. The fate of the dollar rests on the outcome. - Greg Pickup

If Americans, hypothetically told at some future date that stocks and bonds have fallen to one-third of their previous nominal values, could be counted on to behave like sophisticated, diversified investors, saying "Oh well, you win some, you lose some," then the market could indeed fall by two thirds without causing a meltdown. But the behavior of large groups of people, once they start moving, is rarely so rational.... When a market crashes, folks lose their jobs. What happens then to folks who have no hard savings or supplies but plenty of debt ... who have barely been keeping their heads above water? What liberties -- yours as well as theirs -- would they then gladly trade for a steady supply of hot porridge? - Vin Suprynowicz

The whole world believes that the central bankers are so smart they can steer the world economy forward and backwards. Nobody can steer any market. The markets are more powerful than people. It's a paradox in my opinion that at a time when everyone knows the planned economies have failed that there is so much faith in central bankers. I think central bankers will bring the system to the brink. - Marc Faber

There are many families in this country currently living in their cars, going from town to town searching for opportunities. There are countless families living in shelters or under freeway underpasses or even along the freeways in the brush. And, since I've actually had the opportunity to know some of these people, I can tell you that their current situations can be traced directly to the loss of a job due to a recession. Have any of these people gone hungry at times wondering where and how they will eat their next meal? Sadly, yes. And the most heartbreaking part is that many, too many, of these people are children. - Michael Taylor

The Great Depression followed the roaring twenties, what goes up must come down. We're so far up that down is scary. Oh, and following the Great Depression, there was some kind of war in which millions died, I think it was called, Wha-Wuh, no, that's not it? Oh yes, World War II. Here's a big difference: In the 1930s, enough of the population was purely rural that they could live off the land or send the kids to stay with Uncle Tim and Aunt Judy at the farm. Today, Uncle Tim sold the farm and stole the money, left Aunt Judy to live as a gold-chain woman in Miami and Aunt Judy is sweeping floors for a webpage startup to make ends meet. - Cory Hamasaki

No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time... - Calvin Coolidge [December 4, 1928]

CLINTON QUOTES FOR THE MONTH

Victory my ass. We lucked out by not sending anyone home in a body bag. That's the only thing we won. - career officer

Things have changed since President Truman, when Hitler put a bullet in his brain rather than face Harry's stern music. If he'd played war under Clinton rules, he'd have been allowed to give Ike the keys to Berlin while the Nazi army passed in review and then quietly retired to a sunny dictator-friendly South American state. Had I submitted an outline of how the operation went down as a proposal to a book editor, I'd have gotten the Big R -- rejection -- with a note saying, "We don't do Air Power humor" or "Catch 22's already been written" or "Sorry, your imagination's in overdrive. No military operation could have been this bad." - Col. David Hackworth

For the United States, alias "NATO," the planning and launching of this war by the president heightens the abuse and undermining of war-making authority under the Constitution. (It seems to be accepted that the president can order his personal army to attack any country he pleases). The bombing war also violates and shreds the basic provisions of the United Nations Charter and other conventions and treaties; the attack on Yugoslavia constitutes the most brazen international aggression since the Nazis attacked Poland to prevent "Polish atrocities" against Germans. The United States has discarded pretensions to international legality and decency, and embarked on a course of raw imperialism run amok. Our alleged concern with human rights borders on the ludicrous. - Walter J. Rockler [a prosecutor at the Nuremberg War Crimes Trials]

CNN is in bed so often with the Clinton Administration, it ought to provide condoms to its correspondents. - Sam Smith

Today, school shootouts take up more tube time than repeated threats from the Russians that World War III is once again just a launch away! - Col. David Hackworth

Y2K QUOTES FOR THE MONTH

Unlike before, I now believe there is about an 85% chance the market will drop at least 45% [due to Y2K]. And it's a 50-50 chance it will take four to five years to recover to new highs.... The bottom line is, the economy is headed for a recession, like I've said before. But it could last up to twice as long as I originally predicted. - John F. Mauldin

I was in looking at assault rifles today at one of my local gun stores.... I got to talking to the owner, and Y2K came up.... He told me that "more than one" of his best long-term customers, with affiliations to.... [CIA/DOD] groups, have told him of a plan for a "quick response" imposition of martial law. "72 hours." The date he heard from some of them was December 1st. To disburse the troops and have martial law in place in 72 hours. By December 4th, in other words. The idea for the timing, presumably, being that it will be clear by then just how many nations, companies, and agencies are not going to be ready. And enough time for the soldiers to integrate with the rail and utility distributions, perhaps for ration coupon books to be printed and available by January 1st, etc.... He didn't say his sources KNEW that martial law was going to be implemented, but that the sources had seen plans for possible implementation.... Take it as you will. - Tim May

I'm still unhappy about the fact that only two of the "regular" members of the committee bothered to show up for the hearing.... I know that lots of things are going on in the Senate, and May 25th was also the day that the Cox report was released ... but the fact remains that we witnesses (who appeared at their invitation, at our own expense, and having expended a considerable amount of time and energy preparing our statements) were speaking to an essentially empty room. To me, that says a lot about the degree of interest, and the sense of urgency (or lack thereof) that the government feels about all of this. I think Paloma O'Riley had the best comment of all, when she said that all of the concern that is being expressed about panicking and overreaction is ONLY related to preserving the economy; the politicians and government leaders show no such concern about the lives, health, and safety of the citizens themselves. But as the Clinton camp would, no doubt, remind us, "It's the economy, stupid!" - Ed Yourdon

The date code at my job, for our #1 system, is so badly broken, that we are throwing out 300+ COBOL and Macro Assembly programs on our mainframe. We looked at the then 17-year-old system in 1996, and because of its extensive use of dates, and because the system had extensive annual maintenance, worked on by who knows how many programmers, that all think differently, well, we figured it would be impossible to "patch" the system in time. We now have 14 people developing a system from scratch, using all state of the art stuff, SQL, Visual Studio, etc. Here's the best part. We will not be done by SUMMER 2000. We will have enough working to get basic annual production out the door, but the products will be missing quite a few details that are on the current mainframe system. So, from my tunnel vision point of view, yes, the code is broken. But what do I know. I've only been working and playing with computers for 31 years. - anonymous systems manager

Ultimately, there is only a limited amount of control that corporations and government agencies have over the technological outcome of Y2K; yet the prevailing attitude seems to be that government and industry are in control, as long as they can "manage" the perceptions of the public. I have believed, all along, that Y2K is too big, too complex, and too systemic in nature to be "controlled" from a technological perspective; and I believe that the public's perception of Y2K will ultimately be shaped by tangible events that impact their lives, much more than it's shaped by the "spin control" efforts of government and industry. For the past few months, the PR spin control has been quite effective, and I fully expect that it will continue throughout the summer as government and industry seek to "reassure" the public. And since the public would generally prefer to be reassured that the government is taking care of any problems looming on the horizon, rather than face the possibility of serious disruptions, the spin control efforts may continue succeeding even into the fall of 1999. - Ed Yourdon

I work in an IT department at a major bank. While I am not directly involved in the Y2K effort, many of my colleagues are, and I have access to a rich variety of remediation and testing data. The picture I am seeing is definitely not pretty. Our testing schedule is extremely tight. Several weeks ago the OCC mandated additional test dates that must be completed by the end of the month. The implications of not meeting these new deadlines, I do not know. I DO know however, that upper management is in a frenzy. Resources are being shuffled left and right and tension is palatable. I regularly monitor the abend logs and they are plentiful. Resources, system space, job dependencies, data files and warping coordination, etc. all seem to be conspiring against us. My direct supervisors have confided to me that they are stocking food. Of course all vacations have been cancelled. Will we make it? I honestly don't know. Will we say we will? Definitely. We still are rated "satisfactory" by the OCC. Everyone is, that I know of. What scares me is that I honestly believe that we are in better shape than our competitors. - anonymous programmer

For many manufacturing companies, JIT may have a new meaning in a few months: January It's Toast! - Randy Y. Jones

A $75-billion-plus financial services company with headquarters in Minneapolis, Minnesota, that serves millions of customers in locations throughout the Midwest and West has stated the intention to limit cash withdrawals by customers later this year. The bank president who gave me this information is very much against this idea, but due to the size and influence of the aforementioned institution, he feels other banks may follow suit.... he thought it would be a public relations nightmare and would make matters worse.... I believe this policy is an indication of the panic some bankers are starting to feel over the possibility of large cash withdrawals and the accompanying liquidity problems they will bring. - Nabi Davidson

STOCK MARKET OUTLOOK

The extremely-drawn-out nature of this market top (remember: Most stocks have been in "bear mode" since April 1998) certainly makes one wonder, what's going on here? This sucker should have crashed long ago - certainly in the fall of 1998, if it weren't for the Fed's reflation efforts - and yet another window of opportunity in July 1999 appears about to pass by with the crash postponed yet again.

The reason? I think we may be seeing the early effects of the Fed's preparations for sliding through the Y2K crossover. The Fed has expanded the monetary base at an increasing rate over the past year, currently exceeding 15%. That's well above the "typical" 3% to 5%-per-year rate that's considered noninflationary for the long term; yet inflation is "nowhere in sight", according to the pundits. (Personally, I think it's worse than the government statistics show, though.)

Under what conditions could the Fed expand the money supply almost with impunity with no obvious inflationary effect? Only if there's an offsetting intensely deflationary force.... and I feel there is. We have the ongoing asset deflation in the Asian countries, of course, which seems to have stabilized for the time being.... and this is some of the deflationary impact. But what's most intensely deflationary in this country, I think, is the sequestering (the government calls it "hoarding") of extra cash by the public in preparation for Y2K. (Why would the government commission a Gallup poll on the public's intentions toward Y2K and banking if it didn't plan to use the results?)

For each extra dollar in cash you squirrel away for Y2K, up to $100 in electronic money disappears from the fractional-reserve banking system, an extremely deflationary consequence of your action. For the banks to have the cash to give you, they must sell assets (typically, Treasury securities) or borrow from the Fed. Thus the monetary base expands; but since cash is being removed from the banking system, the broadest measures of the money supply do not expand in proportion, and inflation remains relatively benign.

It's unlikely that everybody setting aside extra cash will wait until December to do so; certainly, some squirrelling-away is taking place now, as it is much easier for people to set aside a little extra each week than it is to wait until the last minute, in December, to pull it all out of the bank and risk having withdrawals restricted. (Besides, the majority of people are in hock up to their eyeballs and don't have much cash in the bank to begin with; weekly set-asides are the only way they will have cash on hand at year's end.)

Sshhhh.... this is Alan's secret; he doesn't want you to know this. But Greenspan's background is as a mainframe computer programmer, so he certainly understands the two-digit-year problem; and he certainly understands fractional-reserve banking and systemic risk, so he knows how to prepare as best he can for the change in public psychology that will occur at the Y2K boundary.

But a corollary of a rapidly-expanding money supply is that it will keep a stock-market bubble inflated, if not still expanding (thus the efforts to occasionally "jawbone" the market downward); conversely, the bond market will (probably erroneously) see massive inflation ahead and get spooked.

So, a likely scenario for the next few months is: A stock market where the popular averages don't change much while individual sectors heat up (think "dot-com" here), then fade away; and the bond market sags as interest rates rise. You could see the expansion rate of the monetary base increase to 30% per year or more, which would certainly be alarming to most people, but not to those who understand that extra Y2K cash is being pulled out of the system.

Then, as we get into late October, or more likely November or December, and it becomes clear to the public that the Y2K remediation has failed (not that every effort has failed, for most organizations will mostly succeed; only that the overall effort will have failed due to systemic spread of the failures), the happy-face Y2K spin put out by the PR people and the mainstream media will lose its effectiveness and the odds of financial panic will increase sharply. Then is when we're most likely to see the meltdown, if an accident has not triggered it earlier. (This remains a very-high-risk stock market; a financial accident that escapes the Fed's controlling clutches could blow it away at any time.)

At any rate, since April interest-bearing cash has handily outperformed the market averages, and certainly the "average" mutual fund, so you're being well-paid to patiently wait.

PORTFOLIO REVIEW

A. "Phoenix" -real portfolio, begun on October 1, 1995.

SUMMARY - "Phoenix":

             Original cost:         $ 8,090.45
             Present value:         $ 5,676.66
             Increase:              $-2,413.79 [-29.84%]

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 -20.44%, for a compound annual rate of return of -1.81%.

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:         $ 7,951.88
             Increase:              $  -723.12  [-8.34%]

C. Roth rollover IRA - real portfolio, includes commissions:

SUMMARY - IRA:

             Original (1983-86) cost:  $ 8,326.19
             Present value:            $10,802.19
             Increase:                 $ 2,476.00   [+29.74]

The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is -1.50%, for a compound annual rate of return of -0.11%.

COMMENT on IRA: There is no change from the last issue.

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, 21Jun1999: stock, 185.28; MM, 18.75; bond, 51.20;
inflation-indexed bond, 27.44; 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%; 1998: 5.72%
Gain, January 1 through March 31, 1999: 1.318% (5.45% annual rate of return)
Total gain since January 1, 1988 (11.25 years): 177.65%
Compound annual rate of return: 9.50%   (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 456.55%, for a compound annual rate of return of 16.49%.

E. Current unfilled portfolio good-til-cancelled orders: None.

COMMENT on "Timer's Trend": We're on a BUY signal generated June 17, yet still on crash watch [June 28 update: Now on a June 23 SELL signal. /Nick], with late July the next possible (though unlikely) time for the crash (attempt).

______________________________  TIMER'S TREND  _________________________________
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  | -               *
Tue  1 Jun 99        .  &  .       |10596.26  |-.               *
Wed  2 Jun 99        .# I  .       |10577.89  |-.               *
Thu  3 Jun 99        .  I# .       |10663.69  |-.                 *
Fri  4 Jun 99        .  |  #      }|10799.84  |+.                    *
Mon  7 Jun 99        .  | #.       |10909.38  + .                        *
Tue  8 Jun 99        .  &  .       |10765.64  + .                   *
Wed  9 Jun 99        . #I  .       |10690.29  |+.                 *
Thu 10 Jun 99       #.  I  .      {|10621.27  + .               *
Fri 11 Jun 99        #  I  .       |10490.51  | -             *
Mon 14 Jun 99        #  I  .       |10563.33  | .-              *
Tue 15 Jun 99        . #I  .       |10594.99  | .-              *
Wed 16 Jun 99        .  I  #       |10784.95  | -                    *
Thu 17 Jun 99        .  | #.      }|10841.63  |-.                      *
Fri 18 Jun 99        .  |  #       |10855.56  + .                      *
Mon 21 Jun 99        .  | #.       |10815.98  |+.                     *
Tue 22 Jun 99        .  #  .       |10721.63  | +                  
======================================================================== 

NEXT ISSUE - will appear about July 30.     /Nick Chase

Selected Figures from Gallup Poll:

Horn's Report Card: