DOW at Record level : LUSENET : TimeBomb 2000 (Y2000) : One Thread

With all the bad news how can the DOW keep advancing. Frankly, I'm dumb-founded. I have no idea why it keeps going up, does anybody?

-- Watcher (, March 05, 1999


The DOW may be at a record level but MANY stocks on the NYSE have not made new highs. The advance /decline line is near the lows it reached last October. Not very healthy!!


-- Ray (, March 05, 1999.

Take Y2K out of the picture (the market certainly has). What do we have?

1. Low inflation 2. Relatively low real interest rates 3. Baby boomers in their peak earning, spending & investing years (and more $$ in their pockets to do so thanks to Reagan) 4. Technological revolution still exploding (from mainframes to PCs to Internet & beyond) 5. End of Cold War (another gift from Ron)

There you have it. Forget the other crap. Those broad trends are basically why we have a secular (ie, long-term) bull market. And, absent Y2K, it ain't nowhere near over.

And, BTW, if Y2K were not in the picture, we would get a Dow of at least 18,800 by 2009 (and maybe much higher). Of course, Y2K *is* in the picture...

One other point: *only* the Dow set a record today. It is still basically only on the upper edge of its recent trading range (a 1% range expansion). The S&P & Nasdaq did not set new records (the S&P is close, though). The broad market is 11% *lower* than it was at its peak last April. Only the big stocks (& the tech crazies, I guess) have carried us back this high. In point of fact, perception to the contrary, the overall market has *never* recovered from last year's selloff (the small stocks, in particular, are a mess; the Russell 2000 would have to rise a whopping 25% to back to its old highs).

-- Drew Parkhill/CBN News (, March 05, 1999.

Because Its going to hit 10,000 before the crash, watch and see, @ I have a ):

-- Dowwatching (, March 05, 1999.

Drew is right. Besides, the market hasn't priced in Y2K yet and it may be some months before it does because it is a singular event that almost no one understands. Factor in the reality of a "flight to quality" from overseas (which has been going on for five years and may actually accelerate due to Y2K fears later this year).

Keep your eye on the preparation ball and don't lose sleep trying to figure out the markets.

-- BigDog (, March 05, 1999.

There is a huge disinformation campaign occurring throughout the mainstream media. All of that stuff about low unemployment and low inflation is a bunch of lies disseminated by huge corporations and new world order constructionists like Greenspan. They are pushing the over-inflated bubble economy to the absolute limit of public credibility (to me it has not been credible for years) in order to maximize the public debt so that when the crash comes they will have total control of us by using their financial power. Those of you who are buying into it are in for the shock of your life. If the dow exceeds 10,000 it will just be that much harder on the way down.

-- @ (@@@.@), March 05, 1999.

Spring is hopeful,
Summer is mellow,
Fall is fearful,
Winter is dead.

-- Blue Himalayan (bh@k2.y), March 05, 1999.

Big Dog, you're spot on. Every time another economy tanks overseas, those investors rush to move their money to Wall Street. We've become the investment of last resort for anyone in japan, Brazil, Indosia etcx who wants to preserve his assets. And the market rarely looks more than six months ahead anyway. I'm waiting for July/August.

-- Cash (, March 05, 1999.

Remember, the Dow itself is really only a few hundred points higher than its 1998 high. The market's long-term momentum has slowed drastically.

Also, the Y2K impact on the market may be widely different than currently believed by many. For instance, we may see money moving from stocks of companies with more problems into those which have less. In that way, the averages would suffer less apparent damage. (This to a certain extent is going on anyway, since I understand that the average Dow stock is down 16% from its 98 high, although the Dow is a little higher itself, due to the fact that a few stocks are pulling it up).

-- Drew Parkhill/CBN News (, March 05, 1999.

I was there in 29! Seen what it can do to people....People are different now, not going to be the same as then ): I'm sticking around just to see what happens. Seen it before, going to see it again.

-- Auntemae (, March 05, 1999.

You were *where* in 29?

-- Drew Parkhill/CBN News (, March 05, 1999.

When one factors in the truism that all free market economies experience correction every 60-70 years (the Kondratieff wave theory that depressions occur that often) it makes one wonder. No one gets rich on paper assets forever... There are a lot of people out there who are throwing their retirement in the market, because the government is spending the social security funds to "mask" the federal budget deficit of 5.6 trillion. Anyone ever wonder what that would buy today? The reason that there is no inflation and that interest rates are so low are thusly....if the interest rates went up, what would the payment become on 5.6 trillion dollars?...therefore, they CANNOT. Further, people are experiencing deflation in many sectors because ... The Japanese are in depression, and because of the interlinking of economies and computers and the like...when Y2K hits....all sorts of imaginative scenarios can be conjured up... My gut feeling is that its about to hit the fan... Can you prepare? Not me, a sound mind, a kind heart, a willingness to work, and a low profile will get you through. The lock and load mentality will get you shot. "those who take the sword will perish by the sword"

-- rick shade (, March 05, 1999.

Buying more puts.

-- Mike Lang (, March 05, 1999.

We in this country are enjoying the fat off the land at the expense of others in the third world. OUr cheaper gas is a freeby but it is costing someone in those third world gas producing countries.

A lot of people are refinancing their houses. This can put 100's of extra dollars in saved interest money in their pockets to spend.

Commodity prices are depressed. This too is a savings to the American consumer (but at someone elses expense). The strong dollar will also buy more for less.

WHAT A COUNTRY!!!!!!!!!!!!!!

If Y2K does not bring down the system, I agree with Drew, what but God will bring this system down? ww


Rick: I prepare to lock and load, and not have all my chickens in one basket. I don't live by the sword, I live to survive and defend what is mine, there is a difference.

-- bardou (, March 06, 1999.

Beware! The stock market is getting ripe for a major collapse! Bad news! Never before has America experienced such a long term economic boom. Beware! It will go BOOM, and then the masses will panic!

Prepare NOW!

-- dinosaur (, March 06, 1999.

Harry S. Dent wrote a book called "The Great Boom Ahead" back in '93. He argued that the U.S. economic cycle can be predicted by looking at the demographics of U.S. citizens. Since we have a baby boomer demographic 'bulge', their spending has a large effect. Dent showed that our earning/spending peaks about age 46. So, when are baby boomers reaching that age? Starting in the early 90's. The book predicted a long-term bull market, lasting until about 2007.

BUT, he goes on to point out that the tide will turn thereafter, and we'll head into a deep recession/depression lasting more than 10 years. This is because baby boomers begin retiring in large numbers about then. They (1) earn less, (2) produce less, (3) spend less, and (4) pull money out of the markets rather than putting it into the markets.

Of course, Dent didn't factor in Y2K. And if the Y2K recession lasts too long, it will run into the 2007 demographics-induced recession. It's possible (I hope not) that the Dow high this year could stand for 25 years or more. Other assets will experience depreciation as well.

This oversimplifies his book. For example, he talks about the impact of new technologies, and makes forcasts for other parts of the world (he predicted a lengthy recession/depression for Japan, which happened).

He wrote another book recently called "The Roaring 2000's" which covers which industries will do best, how businesses will reorganize, and how real estate will do in different areas of the country.

-B. Ear

-- B. Ear (, March 07, 1999.

"Too Big to Fail?" from "The Dismal Scientist"...

Analysis by Mark Zandi

Written March 3, 1999

The economy's performance is nothing short of astonishing. During the two years ending in the fourth quarter of 1998, the economy grew by a whopping 4%, while inflation as measured by the GDP deflator slowed to just over 1%. This compares to 2.5% growth and inflation over the past decade and 2.5% growth and 5% inflation over the past quarter century.

Is the economy's good fortune due to long-running structural changes, which would suggest that the good times will continue, or just the result of a number of fortuitous but fleeting events, which would suggest that these very best of times will soon end?

The economy is indeed undergoing a number of structural changes that have raised long-run productivity growth. The accelerated pace of technological change, increased globalization, deregulation of key sectors of the economy, the securitization of financial intermediation, and even the aging of the population are contributing to the economy's stronger productivity gains. Underlying productivity growth is likely close to 1.5% per annum, up from the 1.0% growth that has prevailed throughout much of the previous quarter century.

These structural changes have also resulted in an economy less prone to recession, and when a downturn does occur, it will be less severe as a result. The imbalances that have undone past expansions, such as overbuilt real estate markets, overladen inventories, and overleveraged households and businesses, do not develop as quickly or to such a significant degree as in the past due to these structural changes.

Stronger productivity growth also has very positive economic implications, most notable of which are more quickly rising living standards. More households are able to afford health care and their own home. Moreover, the weight of the ongoing skewing of the income distribution feels less onerous.

While underlying productivity growth is stronger, however, the economy's growth potential is not. At the same time productivity growth has accelerated, labor force growth has decelerated. The labor force grew by 2.5% per annum in the 1970's, 1.5% in the 1980's, and only 1.0% in the 1990's. The economy's potential growth (the sum of productivity and labor force growth) is thus unchanged at 2.5%.

What then explains the economy's amazing performance of recent years? Mostly, just good luck. The global economy's woes have been a boon to the U.S. economy in the form of lower prices. Over the past two years, non-oil import prices have dropped over 5%, farm prices are down 10%, and oil prices have been cut in half. All of this is a direct result of the global crisis, which has lifted the value of the dollar, undermined global demand for many goods, and forced global producers to produce aggressively and cut prices in an attempt to remain in business. This easily explains how the economy can expand strongly with low and declining unemployment and still enjoy decelerating inflation.

Consumers, businesses, investors, and policymakers, however, increasingly do not appear to see it this way. They are buying into the idea that they can do no wrong in this economy. This is best exemplified in the meteoric rise in the stock market. The rise in stock prices has been so substantial over such a short period that the gains not only reflect the economy's stellar performance, but increasingly they are driving it.

The soaring stock market has induced stronger consumer spending as it has lifted consumer confidence to all-time highs and put cash into household pocketbooks through mounting realized capital gains. Surging business investment has also been fueled by the record low cost of equity capital, which has prompted many high-flying high- technology and information-based companies to issue equity to finance their growth. Fiscal policy will soon become an additional source of economic growth for the first time in a decade, as the stock market's gains have lifted incomes, profits, and capital gains, all of which are generating more tax revenues and emboldening plans for spending increases and tax cuts.

The economy's exceptional growth last year was almost entirely due to the extraordinary stock market. If the stock market had only posted gains similar to its average since World War II, then growth would have been closer to 2.5% in 1998, not the 4% actually posted.

This by itself may be interesting, but what makes it a macroeconomic issue is that the stock market is increasingly overvalued. At over 32 times four-quarter trailing earnings, the S&P 500 price-earnings ratio is more than double its average since World War II. PEs should be high, perhaps even at record highs, as the large baby-boom generation quickly approaches retirement. Saving is highest among those in their 40s and 50s and a disproportionate share of their savings is ending up in stocks as much of these savings are in retirement accounts managed by professionals mandated to be fully invested in the market. The risk premium historically required by stock investors has also declined in tandem with the more stable economy and corporate earnings. Yet, should PEs be this far into record territory when corporate earnings at best are growing only slowly and long-term interest rates are no longer falling?

Policymakers do not think so. Federal Reserve Chairman Greenspan has made this clear on numerous occasions, beginning with his "irrational exuberance" speech over two years ago and most recently with his comparison of investing in so-called Internet stocks and playing the lottery.

Despite this hand wringing, the stock market's remarkable rebound from its precipitous decline last summer has to a large extent been the Fed's own doing. The Fed's aggressive actions during that period provided a surge in liquidity-- M2 growth is expanding at close to a double-digit pace-- much of which has found its way into stocks.

The Fed had little choice but to respond strongly to the deepening global crisis by easing aggressively. In the wake of the de facto failure of hedge fund Long Term Capital Management, credit and liquidity spreads soared and stock and bond issuance came to a virtual standstill. For a brief period before the Fed acted, even highly rated U.S. corporations found it difficult to tap capital markets. The Fed was acting in its role as a lender of last resort. As a result of these actions, however, some investors appear to believe that the stock market is too big to fail. As long as the global economy struggles--so the thinking goes--the Fed cannot and will not allow the stock market to falter.

Also driving the overvalued stock market is what until very recently has been robust foreign buying of U.S. stocks. According to the Federal Reserve, foreign holdings currently account for 7.3% of U.S. corporate equities, up a full percentage point in just three years. Foreigners have flocked into U.S. stocks in the global flight to quality.

The hubris and speculation of investors are also driving the stock market's overvaluation. Speculation occurs when investors buy an asset simply because the price of the asset has been rising and is thus expected to continue rising. The asset's future earnings prospects are irrelevant. Anecdotal evidence suggests that this is increasingly true for stocks. The unprecedented runup in the price of Internet stocks this year is the most obvious example.

At some point, foreigners will become more reluctant purchasers of U.S. stocks, particularly when their own economies revive, and, about the same time, the Fed will have to rein in the runaway money growth. Moreover, just when the market is vulnerable there may be a shock that will convince speculators not to invest more in stocks, or even to sell. The list of imaginable events that could trigger such a shift in sentiment is as long as there are nations in the global economy. And then there is always Y2K.

The most desirable scenario is that equity prices trade sideways for sometime. This will allow the economy and corporate earnings to catch up with the market's lofty valuation. A more disconcerting scenario is that stock prices march steadily higher as investors further mark up their expectations for the economy and the DJIA. This would pose an increasingly insurmountable risk to the economy, ensuring that this decade would end in 2000 like each of the past four decades, in recession. ---------------------------------------------------------------------

-- Kevin (, March 07, 1999.

One other thing about the article "To Big to Fail?": it mentions Y2K. I went to The Dismal Scientist site frequently in the fall of 1998, and NEVER saw Y2K mentioned even once.

I told myself then that when I saw a reference to Y2K on Dismal, it would mean that Y2K had arrived as a credible economic issue.

That time is now.

-- Kevin (, March 07, 1999.


Here's another Mark Zandi article on Y2K, this one dated July 27, 1998.

### snip ###


Analysis by Mark Zandi

When will the economy suffer its next recession? There is a vocal, albeit small, group of economists and other analysts arguing that the answer is the year 2000. The reason is the potential failure of computer systems when the clock strikes midnight on New Year's Eve 1999. The most notable worried economist is Ed Yardeni of Deutsche Bank Securities. He ascribes a 70% probability to recession in 2000 due to the impact of the so-called Y2K problem.

### snip ###

Expecting Y2K failures to undermine the global economy is like expecting a large meteor to land somewhere on the planet. Both should be taken seriously and planned for and, while certainly plausible, thus making for entertaining reading or movie fodder, they are both equally unlikely.

### snip ###



-- Morgan (, March 08, 1999.


Thanks for the link. It explains why I didn't see anything about Y2K at The Dismal Scientist during the fall. I wonder when Mark Zandi started taking Y2K more seriously and what prompted his change of opinion?

-- Kevin (, March 08, 1999.


I've read both articles again, and I don't see where he's changed his tune. In the second article, he merely says what many others concur with, namely that the market's overvalued --- and then adds that the whole y2k thing may be a factor (in so many 'uncertain' words). Or maybe I'm being extra thick today and I don't see it.

In the paragraph where y2k is mentioned, the opposite could also happen. Foreign capital infusion into the US stock market due to y2k problems overseas is no less likely.

-- Morgan (, March 08, 1999.


I never said Mark Zandi is now a "GI". He does appear to, using my words, take Y2K "more seriously" least more seriously now than he does the chances of a large meteor landing somewhere on the planet. :-)

Keep in mind, I didn't provide the link to Zandi's article because of what it said about Y2K. The link was because someone had asked why the stock market keeps going up.

-- Kevin (, March 08, 1999.


Point taken, the article **was** on topic. Another point is that we can take that particular statement to have any of several (dismal) meanings. But, good on you for posting it, it prompted me to re-visit the DS web-site, which I hadn't done for a while. Cheers again...

-- Morgan (, March 08, 1999.

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