Yardeni is up to 60% now

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

In case there is anybody who isnt aware already, Ed Yardeni, chief economist at Deutsche Morgan Grenfell, has publically raised his odds for "severe recession" due to Y2K from 40% to 60%. Of course, he can revise his definition of severe recession to mean just about anything from a couple percentage points more unemployment to a full bllown "Depression" or collapse of the world economy..there's some leeway there. Maybe he has defined it carefully somewhere.

It's likely he will increase his percentage forecast higher as the world's pitiful record of Y2K remediation/preparation continues on further.

-- Jesse (tooclassy@aol.com), March 18, 1998


You know, he could be right about the result but for the wrong reason. The bull economy has been so strong for so long that if a "correction" were to occur, it could concievably happen in late 1999 or early 2000. Such a recession could be blamed on Y2K issues even though it might have happened anyway.

Yardini isn't the only one out there predicting severe recession to be about 1 1/2 to 2 years away. He's just one of the few trying to turn it into a technology crisis rather than treating it as a normal part of economics.

-- Paul Neuhardt (neuhardt@compuserve.com), March 18, 1998.

Considering that the other major economists operate in a "herd instinct," Edward Yardeni continues to act in a very brave fashion by publicly stating his belief that Y2K is going to cause a serious problem. He may turn out to be wrong, just as others of us in the Y2K field may turn out to be wrong -- but it's significant that he's providing lots of detailed explanation for his position (see www.yardeni.com). If he turns out to be right, it will be all that much more difficult for people to wring their hands and say, "Why didn't anyone warn us that this might happen?"

-- Ed Yourdon (yourdon@worldnet.att.net), March 18, 1998.

Paul, Here is something I just read from the FDIC............"The Federal Deposit Insurance Corp. (FDIC) told Congress two weeks ago that it has concluded that 21 percent of the country's banks still are significantly behind in fixing their computers.

The agency warned that it might order at least a few small banks to shut down and return all deposits to their customers as early as September if they are not in compliance with federal Y2K standards.".................I don't think this is "a normal part of economics." ---------Gail

-- Gail (jmtomich@students.wisc.edu), March 20, 1998.

Gail, it's a different issue here, independent of the banking problems. The economy has alsways run in cycles with boom following bust which follwed a boom. Moreover, big booms tend to be followed by big busts. I think we can all agree that the economy of the country (and even the world) has been on a pretty substantial boom for a several years now. Therefore, we can't be too surprised if the next bust is a big one.

If the pattern that has been established in the past holds, a moderate to severe recession could reasonably be expected within the next two to four years, Y2K not withstanding. The fact that the new millineum rolls around during that time is coincidental.

Now, could a world-wide Y2K crisis make a recession worse? Yes. Could it hasten the recession that might otherwise take a few more years to evolve? Maybe, although I'm still skeptical about how significantly. My point is that a severe recession during this timeframe is a realistic expectation and I believe blaming it on Y2K issues is a best a stretch of logic and at worst a dangerous, reactionary position designed to work on people's fear of the unknown rather than on their sense of reason.

-- Paul Neuhardt (neuahrdt@compuserve.com), March 20, 1998.

Over the last couple of days I have read most of the stuff on Yardeni's Web site, and I will revise my earlier post. No, I don't yet fear that Y2K is going to be the cause of world-wide recession. I just want to say that I found the tone of what he has posted there to be much more analytical and much less reactionary than has been represented in some posts here.

He is presenting a worst-case scenario. Generally, the worst case doesn't happen just as the best case rarely happens. Furthermore, Yardeni himself says that his 60% number is a gut reaction, not the result of scientific (or even pseudo-scientific) analysis. In short, I still don't see any reason to panic. Be concerned and wary, yes. Panic, no.

BTW, Yardeni does say at some point that it is quite likely that some banks and other businesses will fail simply because so many people will work to "protect" themselves by withdrawing deposits, etc. that they will induce the very failures they are looking to protect themselves against. Talk about self-fulfilling prophecies!

-- Paul Neuhardt (neuhardt@compuserve.com), March 20, 1998.

I participated in a Y2K panel session yesterday, along with Tony Keyes and a couple others. Yardeni did emphasize again that none of us "know" what the outcome of Y2K will be, so his 60% figure is simply his best estimate of the situation.

But he made another point that I found interesting: Wall Street continues to ignore the potential impact of Y2K. It's commonly argued that stock market prices reflect the discounted value of future earnings of a company, taking into account the possible risks to those future earnings -- and yet nobody seems to be taking into account the possibility (not certainty, but distinct possibility) of Y2K-related risks.

As Dr. Yardeni pointed out, a Wall Street Journal article on Mar 17 or 18 (I can't remember whether it was Tuesday or Weds) reported on the likelihood that many of the largest U.S. banks were not setting aside sufficient reserves for bad loans associated with their Y2K-vulnerable customers ... but nevertheless, bank stocks went up that day. Similarly, back in mid-January, every major paper carried the story about the severe risks to the FAA air-traffic control system, the consequences of which could involve grounding half the commercial flights in this country ... but nevertheless, airline stocks continued going up.

It's all very peculiar...

-- Ed Yourdon (yourdon@worldnet.att.net), March 21, 1998.

Ed, having Wall Street ignore Y2K problems isn't that strange when you figure that they have been ignoring a hell of a lot of bad things for a long time now. This wild euphoria that hangs over Wall Street is just plain weird.

Yes, bad earnings reports still dirve stock prices down, but not for very long. Within weeks, or even days, the price is back where it was and then climbs higer. The price of stock on the markets has run so far ahead of inflation for so long that I'm having a hard time believing that future earnings and careful analysis are playing as strong a part in investment strategy as they used to. What is driving it? I don't know, but sweet reason doesn't seem to be as big a factor as is claimed.

-- Paul Neuhardt (neuhardt@compuserve.com), March 21, 1998.

This little blip from Information Week says it all...."The year 2000 date-field problem may affect more than computers. David Yardeni, chief economist at Deutsche Morgan Grenfell, the investment banking arm of Deutsche Bank, has been predicting for some time that the year 2000 problem will cause a recession due to the havoc caused by the disruption in the flow of information. Last week, after the Feds admitted that they would most likely not make the compliance deadline in all their critical systems, Yardeni upped his estimate of the likelihood of a recession in the year 2000 from 40% to 60%."......... I think I'll spare myself the trouble of standing in lines.

-- Gail (jmtomich@students.wisc.edu), March 22, 1998.

Just a semantic note on "panic" and "prudential". IF panic is defined as an overmastering and unreasoning, often groundless, fearor fright; and IF prudential is defined as habits, motives, policies,or considerations which are sourced in forethought, business sense, or practical wisdom; THEN repositioning assets now in light of an over-ripe long wave K-Cycle, a toppy/choppy Dow trying to reach 10.000 before blow-off, the expanding Asian liquidity whirlpool, the approaching social "Fourth Turning", and the ever more solid (and not reassuring) hard data on the y2k situation in both public and private enterprises in all 185 nations, hardly stikes me as a "panic" response.

Any one or all of these factors are grounds enough to reach the prudential asset repositioning inferences that many, such as Warren Buffet and Gail, have reached. These cannot be fairly or accurately labeled "panic" responses or the result of shoddy logic given the data currently available and growing exponentially.

If any of the readers of this Bulletin Board would be willing to crit my 3/18 Wednesday column, "Ignorance, Denial, and Y2K" on the Westergaard Year2000 website (www.y2ktimebomb.com) under "Digital States and Associations", I would be thankful. I intend to revisit the issue in about four weeks and do a rewrite based on suggestions, criticisms, and growing experience.

-- Victor Porlier (vporlier@aol.com), March 22, 1998.

The only comparison I can think of when I see the stock market skyrocketing is that of fattening up the calf before the slaughter. ----------Gail

-- Gail (jmtomich@students.wisc.edu), March 23, 1998.

M3 in now over 5.5 trillion US$. If 10% of the holder decide to convert 50% of their hot assets into cash that's 275 BILLION in cash that will certainly not be there on such a demand. This does not consider a small cashout from Equities/Bonds (markets which are approximately 20+ trillion in size). Once people start to feel that there is no cash then they will definitely panic (as in the aforementioned irrational compulsion). BTW most of the 550 billion in actual cash is overseas, not here in the USA.

Its not a very pretty picture. Do what you must do. But by all means "avoid the rush".

-- Charles Polk (c.d.polk@usa.net), March 23, 1998.

I will agree with Victor that there is a big difference between the impetus for the panic response and the prudent response to any situation. I guess my point of view would be that there are a lot of people in the world who are reading one or two articles, thinking they have a clear picture of an impending Y2K disaster and then issuing a panic response.

Even after reading several thoughtful and informative books like "Time Bomb 2000" and making an in-depth study of the situation, there is still a panic response out there in many people. The carefully and thoughtfully reach the conclusion that there could be a problem, then automatically react to the worst-case scenario as if it were the gospel truth.

Ed tells me that I am being almost delusional about my willingness to accept that the world will keep on spinning reasonably well after the century rolls over. Okay, fair enough, and some of the things that I have seen and read over the last few weeks make me a bit more concerned. Still, I think that life will continue in a reasonably orderly and coherent manner.

However, I will submit that the opposite extreme exists and is just as delusional. To wit, the assumption that the worst is going to happen and that one must protect themselves against the worst at all costs, even if that means helping to trigger that very worst case scenario. Face it, if even a small percentage of the population cashes out their bank deposits and stock holdings over the next 648 days, severe global recession is inevitable. Then you would have your Y2K-induced recession, but it would be induced by the cure and not by the disease.

There simply has got to be a middle ground here. The trick is finding it in time, and persuading enough other people to move to it. Frankly, I'm not optimistic.

-- Paul Neuhardt (neuhardt@compuserve.com), March 23, 1998.

Paul, my problem with your last post is that it does not appear to take into account, sufficiently, the economic forces now in play that are leading towards an "economically induced" contraction regardless of citizen responses to y2k possibilities/probabilities.

First, I live in Manhattan and can tell you that there are already a growing number of Insiders on the Street that are moving their money based solely on economic projections. Warren Buffett is only the most prominent of these. As he has said, "...try to be greedy when others are fearful, and fearful when others are greedy." He got it right in the 73/74 blowoff and the situation, economically, is far worse today. The 73/74 blowoff was at the cresting high point of the Long Wave which began in 1938, which was the end of the trough of the last Long Wave. We have been in a choppy and erratic downturn now for over 20 years. Today we are very close to the trough of this one. Such waves, historically, last roughly 60 (plus or minus) years.

Second, debt is about to break the economy. It is now 93% of annual disposable income. The comsumers are tapped out. No amount of fiscal or monetary stimulus will trigger a new consumer/producer binge. And the use of margin debt to buy stocks is the highest it has been in 50 years. Margin debt is almost twice as high as it was just prior to the October 1987 "correction".

Third, the US stock market is at its most over-valued ever. The price-to-book for the broad S&P Industrial Index is at over 5, the highest in history by a wide margin, while the dividend yield is well under 2%, the lowest in history. Many prescient market analysts with excellent track records have reached essentially this same conclusion among them Adrian Day, RE McMaster, .......

To urge people not to "panic" and avoid repositioning their assets now, just because the y2k data is not yet conclusive enough by your subjective criteria for you to act; and then to guilt out those, whose criteria differs, by charging them with being held uniquely responsible in the future for a "y2k induced recession" is stunning.

A major economic contraction is coming whether or not y2k creates an economic wrinkle or not. I may be over reacting to your judgmental analysis, so if you are a trained economist or serious market analyst, please correct my analysis with the hard data (that contravenes what I have said here and in other posts) that leads to your more reassuring conclusions. I would just as soon return to economic optimism and psychic euphoria. For me the y2k implications are just going to make an inevitable depression far, far worse. If you can help me to go from :-( to :-), I'll be long in your debt.

-- Victor Porlier (vporlier@aol.com), March 23, 1998.

Actually Victor, as I have already stated briefly in another post in this discussion, and in more detail in another thread, I have absolutely no doubt whatsoever that an economic downturn is coming. I believe it is inevitable, and it is quite likely to occur in the next 12 to 24 months. The fact that the Y2K issue reaches its peak during that same time frame is, so far as I can tell, largely coincidental.

Can Y2K problems exacerbate the situation? Certainly. Could they hasten the downturn by acting as a catalyst? Yes. Will they actually be the root cause of that downturn? I have yet to see any compelling evidence that this would be the case in any situation short of a near total collapse of modern civilization. Since I have already stated that I believe that civilization will in fact survive Y2K reasonably well, I am forced to take the position that to blame any recession or depression on Y2K is too big a stretch to be supportable. But that is just me.

No, I am not an economist. I'm just a little old country boy programmer from Lubbock, Texas who somehow ended up plying his trade in Boston. Believe me, I don't begin to think I should be arguing with luminaries like Warren Buffet about the economy, especially since my limited knowledge of the situation leads me to the same conclusion that his vastly superior knowledge does.

However, I am just pig-headed enough that I'm not going to take Edward Yardeni's word that Y2K is going to collapse the world economy at face value. He will have to offer some hard evidence, and he has yet to meet that standard with me. He raises multiple questions in my mind, and has started me thinking about issues that I had not previously considered, but he hasn't convinced me. (Actually, in reading his Web site, I'm not really sure he has convinced himself, but that's a discussion for another time.)

-- Paul Neuhardt (neuhardt@compuserve.com), March 24, 1998.

My last post didn't address one of Victor's issues, so I'll do it now.

I am not saying that people shouldn't react and preapre for a downturn ranging from moderate to severe in the economy. Personally, I believe that they should.

What I am saying is that they should not be blaming that downturn on Y2K and reacting as if they will lose everything if they do not withdraw all of their assets from all institutions untill after the Y2K issues resolve themselves. Protect yourselves, please, and in any way you see fit. I just hope that the way people choose is within the system and not outside it, because if too many people move outside the system it will force a lot of others out into the cold who otherwise might have been okay.

Someone once told me that they were afraid of losing everything like so many people did during the late 20's and through the 30's. I have just one response to that: Remember, a lot of people made money during that time, and I doubt that too many of those people stayed healthy, wealthy and wise by reacting in panic to every isolated event. They took a longer term view, weathered a few storms and by prudent and thoughtful behavior managed to prosper even during lean times.

-- Paul Neuhardt (neuhardt@compuserve.com), March 24, 1998.

Paul, Good! Your arguement becomes clearer to me. A number of us then agree that an "economic downturn is coming" (you predict between March 1999 and March 2000, I see the possibility of the start of the downturn as early as late autumn this year).

Are you confusing Ed Yardeni with Gary North? Ed is projecting the high pobability of a "1973-4 type contraction". Scary Gary is predicting what you call "the collapse of the world economy" or the end of the world as we know it. My wild ass guess is its going to be worse than Ed thinks and better than Gary thinks.

When you recommend staying "within the system, not going outside", are you counseling people to get out of equities and into CDs and zero coupon bonds? Or? Is getting into precious metals or hard goods and durables getting outside the system? If a retired couple who own their home, depend on social security andmodest pension checks for daily living and have say $15,000 in Cds, would you counsel them to keep their money in CDs and trust the SYSTEM to 1) generate their monthy checks on time without interruption, and 2 ) guarantee that their little community bank will not close its doors for even a week and insure easy and immediate access to their cash when requested/needed?

Would you advise them to stay within the system and trust that just-in-time food delivery systems will not fail and, therefore, buying say 3 months of food in advance will contribute in a small way to bringing on the Y2K induced recession ( Butterfly wings and hurricanes and all that)? For those living in metropolitan highrises would you counsel being in them on New Year's Eve 00 or elsewhere? Enquiring minds want to know, especially this old Army Brat who wound up plying his trade in Manhattan.

-- Victor Porlier (vporlier@aol.com), March 24, 1998.

Victor, I am not giving specific advice for fear someone might follow it. There are a lot of good, prefessional finacial counsellors out there in the world who can help people diversify, minimize risk, etc. My advice: If you have questions, seek out such a person.

No. I'm not confusing North and Yardeni. Yardeni, as I see it, is warning of possible severe consequences of Y2K and hoping that they can be minimized. North is predicting the collapse of civilization and actually hoping that such a collapse occurs.

-- Paul Neuhardt (neuhardt@compuserve.com), March 24, 1998.

Paul, while you are not confusing the projections of Yardeni with North, I am confused.

On 3/23 you posted, "...I'm not going to take Edward Yardeni's word that y2k is going to collapse the world economy..."

On 3/24 you posted, "Yardeni...is warning of possible severe consequences of y2k."

Is it just me, or does this not compute? "Collapse" and "severe consequences" aren't usually used as synonyms in my experience.

-- Viuctor Porlier (vporlier@aol.com), March 24, 1998.

Simple answer: Buy Gold, Guns, Ammo, Whiskey, Cigarettes,find an isolated place in the desert, wait til the shooting stops, then you will be the KING.

-- autrey (autrey@home.com), March 24, 1998.

"I really enjoyed your titanic film Mr. Cameron, but frankly the fallback plan you've conceived would only be ridiculed by the academy."

-- Jean Randall (ZAMSIMBA@aol.com), March 25, 1998.


The general tone of Yardeni's message is, to paraphrase, "serious consequences" from Y2K. One such consequence he mentions is the collapse of civilization as we know it due ot relience on technology that will no longer function properly. While the two concepts are not synonymous, neither are they mutually exclusive.

I also stand by my statement that I'm not going to take Edward Yardeni's word (or, for that matter, the words of Edward and Jennifer Yourdon or Gary North's) for anything as dire as the collapse of civilization without a hell of a lot of *serious* proof. That's a big thing to take at face value, no matter how much you may respect the author's opinions.

Having said that, I find both the Yourdons' and Yardeni's published arguments interesting, thought provoking, and much less alarmist than I had been led to believe by other people's reactions to them. I find no evidence in either set of work that makes me accept the collapse of civilization as a likely enough circumstance to prepare on that level.

True, they all mention that civilization as we know it could end, but none seem to be pushing that as the probable result. As I read it, what they are saying (and what Ed Yourdon is backing up with action) is the following: "Bad things are going to happen. They could bad, very bad, or catastrophic. We think some things will be bad and some very bad, with a few catastrophies thrown in here and there. Think about it and decide what to do. We recommend you prepare for catastrophic, but do what ever you think is best."

-- Paul Neuhardt (neuhardt@compuserve.com), March 27, 1998.

Moderation questions? read the FAQ