Ed Yardeni's Response to Merrill Lynch's Y2K Survey

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The following is Ed Yardeni's response to the Merrill Lynch Y2K Survey. It is complete and unedited:

Date: Sat, 11 Jul 1998 09:43:26 +0100 From: Ed Yardeni Subject: Merrill Lynch Y2K Survey Is Naively Optimistic To: y2kreporter-recipient@yardeni.com X-Original-Envelope-From: yardeni@ix.netcom.com Content-Length: 6786

In the comic-classic movie "What About Bob," phobic Bob (played by Bill Murray) tells his shrink that there are two kinds of people in the world: those who like Neil Diamond and those who don't. In my opinion, there are two kinds of people regarding Y2K: those who Get It (GIs) and those who Don't Get It (DGIs). The GIs, like myself, are pessimistic about the eventual and inevitable outcome. We are alarmists. We believe that so much is at risk that there is no way there won't be significant disruptions, malfunctions, and crashes in vital computer systems. In our opinion, you have to be naively optimistic to conclude that everything will be fixed in time just because the consequences of failure are obviously so grim. I think we are realistic pessimists. (Unlike Bob, I had a happy childhood and am an optimist at heart.)

The folks at Merrill Lynch are naive optimists in my opinion. They just don't get it. They just issued a very impressive 440 page survey of thousands of companies around the world to assess their Y2K preparedness. The general conclusion is that "companies appear reasonably confident of their own Y2K issues, but uncertain about those same issues at their suppliers and customers." Before I launch my GI counterattack, I want to praise ML for this great effort. ML has enormous research resources and it is laudable that they've mobilized them to assess the Year 2000 Problem. I hope that they are now committed to providing quarterly Y2K progress reports of all the companies they follow around the world.

While I disagree with the overall optimistic conclusion of the ML assessment, I found lots of very useful information there that actually increased my concerns about Y2K. In other words, the ML survey has a wealth of information that can easily lead to exactly the opposite conclusions about Y2K! I would love to turn more optimistic about Y2K. But the ML data doesn't do it for me. Here is why:

1) Why is ML willing to trust the informal assurances of their responding companies, when those very same companies don't trust the assurances they've received from their suppliers and customers? Of course some of the doubts about third parties may be attributable to the fact that the responding companies haven't even asked them yet about their Y2K compliance.

2) ML's survey methodology is totally inadequate. Apparently ML analysts simply asked their companies if they will be ready. Some may have asked more pointed questions than others. In any case, there was no standard questionnaire and no indication of who provided the answers to the informal and ambiguous survey. At a minimum, companies should disclose how many mission-critical systems they have and how many are in production--not just "fixed" and ready for testing. They should also disclose how many mission-critical systems are from third parties and have not been delivered yet.

3) ML analysts were asked to assess whether their companies: i) will be compliant, ii) likely, iii) less likely, iv) unlikely, or v) don't know. Nearly all of the surveyed companies fell into the first two categories. I couldn't find one that is "unlikely" to be compliant, and only a handful that are "less likely."

Now let's look at the evidence in the ML report that completely contradicts the optimistic spin provided in the introduction to the survey:

1) ELECTRIC UTILITIES: In the US, the ML analyst observes that the level of preparation of the electric utility industry is a "mixed bag." Some companies are still assessing the problem. There is a "risk that Y2K issues could result in power flow interruptions for the transmission grid." The analyst gives a "thumbs down" on Y2K disclosure, yet he ranks most of the companies as "will be compliant" or "likely compliant." In Japan, the analyst observes that "electric power companies are pretty much on their own in tackling the Y2K issue. They report that MITI, which oversees electric utilities, has not come up with any special guidelines or test standards to meet as of this writing." Among other Asian nations, Pakistani, Malaysian, and Chinese electric utilities appear to be least prepared, according to ML.

2) TELECOM: According to the ML survey, the one and only noncompliant standout on the in telecom services on the planet earth is Brazil's Telebras. However, the ML analysts in Japan provided only three short paragraphs on there companies, noting that NTT was "lucky" to change headquarters three years ago, so it is ahead of its competitors. A recent US State Dept survey showed that roughly half the nations in the world are not moving fast enough to fix their phone systems.

3) BANKING: The ML survey is surprisingly upbeat about banking in Asia. However, "25 percent of respondents fear the interbank clearing and settlement systems may not be compliant in time." The analysts covering banks in Continental Europe hedge their optimistic assessment by noting that all banks have to claim they will be compliant because "any public declaration of this not being the case would lead to regulatory action such as forced mergers, and possibly even withdrawals by depositors." A good point that applies universally to all companies in one way or another. The analyst of Japanese banks declares, without proof or explanation, that Japanese banks don't have to spend as much money or time on Y2K as US banks because they use more mainframes. He doesn't mention the impact of the Asian Crisis on Y2K remediation efforts, nor the regional risks of even more nonperforming loans caused by Y2K troubles. In the US, banks are expected to finish the "nuts and bolts" in 1998--leaving 1999 for testing. Interestingly, the US banking analysts didn't provide a table of expected compliance. Instead, they show the percent of estimated Y2K costs spent through March 31, 1998. The median was only 30 percent!

That's enough for now. After all, I'm supposed to be on vacation. However, I received so many e-mails about the ML survey, I decided to respond now. Fortunately, a friend messengered the report to me just before I left New York and I had plenty of quality time to study it next to a pool. Again, I applaude ML for their great effort. It does provide quite a bit of good news about Y2K. I expect that there will be more and more good news as judgment day for our computers arrives. But let's stop being naively optimistic; some systems are bound to fail and we must prepare to cope with the resulting disruptions. Interestingly, about a week ago, Canada's Task Force Year 2000, issued an update showing a marked improvement in the number of Canadian firms that are taking action, but still found enough bad news to recommend that "all economic sectors should accelerate the development of contingency plans...."

Ed Yardeni

-- Pastor Chris (chrisbr@ptinet.net), July 11, 1998


Pastor Chris, Thanks for the interesting report. Since you are a man of the cloth I will assume that these are indeed Yardenni's own word. It will be really interesting when he publicly makes the same criticism of his competitors at Merril Lynch. Then we can watch this huge debate over the middle ground of Y2k. Neither this report nor anything that Yardenni has written supports a scenario worse than a recession comparable to the one we had in '73/'74. From the trenches it appears that we should expect something along that order of magnitude. I wonder if that scenario supports the notion among some people that we should in July of '98 be trying to scare the hell out of everyone we know? I wonder whose Y2k efforts will be enhanced if my 74 year old retired father becomes anal retentive about an issue in which he can not play a role in the solution? I wonder what Yardenni's prediction would be if he factored in a scenario in which the general public became convinced in 1998 that there was no hope for avoiding outcomes far worse than the worse case scenario Yardenni has predicted? I wonder what Yardenni thinks today's economy would look like if we had in 1980 re-elected Jimmy Carter with his message that our best days were behind us rather than Ronald Reagan with his message that the best days were yet to come? The most noise on the Y2k issue is generated from the extreme ends of the argument - no problem vs. the end of the world as we know it. I would like to thank you for contributing evidence that shows that the giant sucking sound we all hear is the sound of this debate being pulled into the middle.

-- Oscar Swischne (foaddgc@usa.net), July 11, 1998.

Once again, Oscar, thank you for the "we are the world" speech, man I wish I was there to hold hands with ya.

Your father needs to go buy some beans and rice, bud. Since you seem to think that the way to handle this most unusual event is to not get worked up, cause, gee, we can't fix it ourselves an, an we just all need to get along here, why not Federally mandated Prozac for everybody that thinks this will be bad and maybe lobotomies for the really recalcitrant?

You asked who would benefit if your dad got "all anal". Well, Einstein, HE would if his concern moved him to prepare even minimally with FOOD and WATER. So would your sorry butt, 'cause I am sure he'd feed you too, along with any other poor unfortunate souls in his circle put to sleep by your rhetoric.

Middle of the road types are all pukes. Give me someone with the exact opposite of my views over a fence sittin' weasel any day. At least someone on the other side makes the effort and has the courage to have a REAL OPINION. That I respect.

There is nothing in the middle of the road but yellow stripes and dead armadillos.

-- Will Huett (willhuett@usa.net), July 11, 1998.

Will, You are such a wise fellow. I would answer your arguments specifically if you had made any specific arguments. But no, you merely spewed some mindless dribble which probably made you feel important at the moment. Let's see, well you didn't offer any proof that the our civilization will melt down in eighteen months but you obviously feel that way. I guess I should accept that because big Will says so. There must be something we can argue specifically. In view of the fact that you apparently are functionally illiterate when it comes to complex systems I'll address the only comment you made which resembles a substantive position. I guess I should accept your arguments against a middle ground position because your proof was your abililty to use vulgarity to buttress your position. This old marine does not count you as a man simply because you can talk dirty. Your position (probably borrowed from Rush Limbaugh) is that you take exception with anyone who positions himself in the middle of an issue. That's not the way you said it, but trust me that is a fair recreation of your very unoriginal point. Where do we go from here Will? It is either the end of the world or no big deal, right? You are on the side of the end of the world. I, who build the complex systems which scare you so much, think that the answer is in the middle. In order to get to your scenario( fancy word which means possible outcome) all my peers would have to not only do nothing for the next eighteen months but also undo the work they have already done on this problem. For the other extreme scenario we would see no problems in the Year 2000, that would occur if virtually everything was fixed. In the middle is a situation (do I have to explain that word) where most systems are fixed but many fail, causing disruptions and inconveniences and probably some economic setbacks. Will, there is no evidence to support either extreme and there is mounting evidence to counter most of the most dramatic and frightening predictions which got you all worked up to begin with. Why don't you take yer ole shotgun, go out an' waste a few racoons and leave this complicated technical stuff to professionals. If you had a bad heart and needed surgery would you trust a doctor or your local blowhard?

-- Oscar Swischne (foaddgc@usa.net), July 12, 1998.


I don't know who you are, but you haven't done your homework. Just a little reminder that "man who stand in middle of road get hit by cars going both directions."


-- Pastor Chris (chrisbr@ptinet.net), July 12, 1998.

Hey, Oscar. You seem to be treating this issue as though it were a problem of perception, a political problem, an exercise in rhetoric, when it is in itself purely a technical problem, best understood by experts. The experts are speaking loudly and clearly. Yardeni is not a computer man. I will take my cue from the technical experts like Yourdon and others who have set up their websites in the public interest. They are a special caste posessing special knowledge who have provided the technical infrastructure for this global village. They know the security and very existence of this new structure is threatened. They are sounding alarms to mobilize political will. Their message is uncomfortable because they ask the people to educate themselves about the nature of the world they live in and take for granted. The people are very ignorant and prefer to stay in the comfort zone of this ignorance. They ask the people to prepare for the worst, and the irony is that by sounding alarms the worst may be avoided and this new global village may be salvaged. In your effort to provide for the comfort of your elderly father you may be guaranteeing his ultimate discomfort. You may be undermining the efforts of those sounding alarms and helping to dilute political will, insuring that the outcome will be more serious rather than less. Politicians, who are a craven lot on the whole, appeal to the weakness of the people, but real leaders ask the people to ask more of themselves. The people of this country need to be made uncomfortable and they in turn need to make their leaders and their providers of services uncomfortable. These computer experts are the real leaders now and you're not making their task any easier.

-- Joseph Danison (JDanison@aol.com), July 12, 1998.

Ok, Oscar, you want something specific to argue about, here it is. You're opinion regarding the eventual reality of Y2K is pitifully misguided, but more importantly, it is utterly irrelevant to the task at hand for all of us mere mortals.( As opposed to Programming Deities such as yourself) Your insistence on some sort of careful, rose-colored analysis of risk levels will merely assure great suffering in all the people you care about come THE DAY, what arrogance! It is the height of stupidity to listen to someone chanting " don' worry, be happy" in the face of potential risks of this magnitude. I could be reasoned and polite in the face of your delusional denial, or what's worse, your deliberate obfuscation in an attempt to " promote reasoned debate", but why should I? It is time for the people in this country to WAKE UP and start personal preparations for disruptions in basic services. You will sit here and chant to anyone who will listen that now is not the time, then when the herd smells smoke you'll be right down there with the masses, your nose pressed up against the glass at the Walmart, trying to buy a candle and some Fruit Loops. You won't be any good to anybody because you spend all your time sayin' it ain't so. Preparation is the ONLY rational course of action for the people reading this forum, and smug elitists like yourself are the allies of inaction and delusion. As such you do not deserve kind words but Hal's two-by-four.

-- will huett (willhuett@aol.com), July 12, 1998.

I sure got you guys out of your comfort zones, didn't I? Whose in denial the person weighing objective, factual evidence or the person who sees abstract issues and draws finite conclusions based on emotion and the hyperbole of some writers whose track records for predicting the future are dismal at best?

-- Oscar Swischne (foaddgc@usa.net), July 12, 1998.

I've been reading about Y2K for over a year and preparing to some degree for almost that long yet on this forum I'd be "middle of the road" with Oscar. I've taken it seriously enough to radically alter how I store my life savings, stocked up on what we used to call "taboo food" here, and made many unsuccessful attempts to warn family, freinds, and coworkers about the need to prepare for lean times ahead. Why I am I middle of the road on Y2K? Because NOBODY KNOWS what will happen. It's all speculation. Sometimes well informed, sometimes not. My viewpoint is that Y2K is a very real, possibly catastrophic event and that people should prepare to feed, shelter, medicate, and protect themselves and their loved ones. For how long? Who knows? Might be a three day weekend, or a month, or 3 months, or indefinitely. My gut feeling is 3-6 months of real hardship and nastiness in which quite a few peoples actually die, many more are ruined financially, the two major parties are finished for good and left on the scrap heap of 20th century history, and years and years of lawsuits. And guess what? This time the lawyers are right. Businesses and governments were warned repeatedly and did too little, too late. No, not TEOTWAWKI, But definitely one for the history books. Our generation will be ridiculed as the one so stupid they only put two digits in their computers. Doh!

-- anon (anon@anon.com), July 12, 1998.

Sorry to burst your bubble, Anon, but your position is NOT middle of the road.

Oscar said: "Whose in denial the person weighing objective, factual evidence or the person who sees abstract issues and draws finite conclusions based on emotion and the hyperbole of some writers whose track records for predicting the future are dismal at best? "


-- Will Huett (will huett@usa.net), July 12, 1998.

Hey I'm not as smart as you's guy on this stuff but I can see and listen Something is going to happen and being prepaired for some of it not a bad idea. On cnn new they showed the opening of Hong Kongs new airport the new computers did not work and there was total disruption they had to go back to the old airport now I know this is not y2 related but it does show what can happen.The whole worlds in the fast lane maybe slowing it up not a bad idea look and listen they want to change the tax code in 2000 but dont know to what they know more about this then they let on by the way middle of the road means you go from side to side feeling your way when you know your course your on that highway north or south no two way

-- Steve M (ltyw90a@prodigy.com), July 12, 1998.

It seems obvious to me that, as one pastor said, "Our idol is going to fall on us". It will be us and our neighbors hopfully without T.V.. Many will be hungry and cold. Some will rebuild. I hope to be an encouragement. I hope I am able to help others spiritually and physically. Preparing in this way is a good plan with or without Y2k.

"What does the Lord require of you (us)? Act justly,love mercy, and walk humbly with your God". Micah 6:8

-- Ramsay (ramsay@instanet.com), July 17, 1998.

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