PBS "Frontline": "Crash"

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I see that the PBS investigative series "Frontline" is running a program called "Crash" this coming Tuesday evening. This will mark the second time in the last couple of years that "Frontline" has aired a show warning of a possible stock market crash; the last time was in early 1997 (I think), when the Dow was thousands of points lower than it is now. (I'm assuming that the upcoming program is not just the earlier program recycled, but, this being summer, you never know.)

Given the staggering overvaluation in the stock market as shown by the Federal Reserve's own stock valuation model, I suspect that the good folks at "Frontline" are (probably vainly) trying to get American investors to exercise something remotely resembling sanity. This market must be at or near record overvaluation. The Fed model currently shows the S&P 500 Index overvalued by around 45%--and that assumes an increase in corporate operating earnings of 20.7% over the next four quarters, which nobody believes. The analysts and economists for I/B/E/S furnished their projected average EPS estimate of $54.33 for the next four quarters without apparently realizing that the four-quarter trailing number would be so low ($45.01). I think that most CEOs would be ecstatic if they had a 10% growth in their operating earnings over the next year; well, with a 10% earnings projection, the Fed model shows an overvaluation of 62% or so in the S&P 500 Index. By the way, the actual across-the-board growth in corporate profits (after taxes) for Q1 1999 was just 6.2% (annualized rate)--and that was the strongest growth in four years! (Earnings were absolutely dismal in 1998, though you wouldn't know it by the increase in stock valuations.) There are obviously differences between after-tax profits and operating earnings, but if you were to plug 6% into the Fed model as the value for projected operating earnings, you'd find the S&P 500 Index overvalued by about 70%. And when the Fed starts hiking interest rates this week, thereby raising the cost of capital, the stock overvaluations will be even greater, assuming there isn't a corresponding decline in stock prices.

It will be interesting to see whether or not "Frontline" mentions Y2K fears or uncertainties as a growing threat to this huge bubble market. I've seen a couple of recent surveys along those lines: one found that 6% of investors are considering pulling out of stocks this fall; another survey found that 10% plan to pull out of mutual funds. One wonders what will happen to those numbers as September and October approach.

I listened to some of the talks given at Yardeni's T-200 Y2K Action Day Conference (broadcast over the Internet), which featured some of the world's top experts on Y2K. The prevailing opinion seemed to be that we have avoided doomsday but that the current public complacency is most definitely not justified. Yardeni himself sticks to his Y2K projections: 25% chance of a bump in the road (relatively speaking), 25% chance of a mild global recession, 45% chance of a severe global recession, and 5% chance of a global depression. In his talk with Gary Beach, editor of "CIO Magazine," Yardeni and Beach agreed that Y2K is likely to become big news starting in September. (Beach, incidentally, hobnobs with a lot of CIOs--and he says that many of them are still very worried, especially about supply lines, which is a perennial Yardeni worry as well.) In another talk, Bruce Webster, chair of the Washington D.C. Year 2000 Working Group, gave the results of the recent WDC Y2K poll (which you probably know), then he added that 40% of respondents chose to submit written remarks in the "comments" section provided. A frequent refrain of those written remarks, from folks who are actively involved in major corporate and govt. Y2K projects, was that there is a fundamental disconnect between the good news being given to the public about their entity's Y2K progress and the actual facts of the situation. If that is true, then I doubt that PR releases will be able to keep a lid on this situation much longer; an American public already conditioned to distrust politicians and corporate leaders is likely to start wondering in the final months of 1999 if the Y2K situation is quite as good as they have been told. Again, you have to be concerned about the way such likely uncertainty is going to play out on the stock market this fall. Finally, one must be troubled by those periodic Gallup polls, the latest commissioned by the Federal Reserve and the FDIC, which show that about 14% of Americans "definitely or probably" plan to pull all of their money out of the bank before 2000 (with an additional 28% or so planning to take out enough cash for several weeks or so). I've followed those polls since December, and what is most disturbing is that those numbers haven't changed much over the past six months. As for the banks themselves, the Fed says that only about 3% of the 10,400 FDIC-insured banks are behind schedule for the June 30th deadline; Weiss Ratings says about 22% are behind. It's most likely that the truth is somewhere in-between, but I'm enough of an optimist to think that most of the laggards would get at least their mission-critical systems finished by later this year--if they are given the chance. But crowd psychology does not seem to be in our favor, and the banks themselves seem to be failing in their efforts to convince that hard-core minority that their deposits will be safe. Most people on this forum already know how just how fractional the fractional reserve banking system is (somewhere between $.86 and $1.50 in bank vault cash reserves for every $100 of deposits) and just how limited the FDIC is (the FDIC can currently cover less than 1.5% of all bank accounts nationwide; for that matter, most of the FDIC's assets are presently not in cash: reportedly, the FDIC has about $258 million in actual cash, while there is over $4.3 trillion in American bank deposits). If these figures get out into mainstream America, there will be even more trouble, obviously--and between a sensationalistic press and the various outfits trying to hawk gold coins, etc., I expect these numbers will get out there in the next few months.

I wish that the Gallup polls would do some sort of "profile" of those 14% of Americans planning to withdraw all their money from banks. My unpleasant suspicion is that many of them are older Americans who lived through the Great Depression and its hundreds of bank failures; these are folks who tend to have large bank accounts and certificates of deposit, whereas many younger Americans are principally into stocks and bonds these days. Obviously this would turn the "numbers game" even more against us.

Of course, the Fed will have $200 billion in cash in emergency reserve (an additional $50 billion being printed to add to the $150 billion normally kept in emergency reserve); unfortunately, some of that will probably go overseas to our currency vaults in Europe and Asia to meet possible runs on greenbacks over there (currency markets may shake, rattle, and roll), and it is unlikely that the Fed would utterly deplete its cash reserves anyway--and even if all $200 billion were actually shelled out here at home, that works out to only $1000 or so per American adult. Finally, there is the currency already in circulation, of course (i.e., not in bank vaults): it's thought that about 2/3 of that is presently out of the country since the greenback is the currency of choice in many Third World countries (also, can you say drugs and money laundering?); the remainder works out to about $500 per American. In short, if there is a very strong demand for cash, it's problematical whether or not that demand will be met. It's a closer call than I like.

I begin to fear that bank runs are more likely than not; that same latest Gallup poll showed that 47% of Americans believe there will be bank runs--and if that's not a strong candidate for a self-fulfilling prophecy, I don't know what is. One suspects and hopes that in an emergency the federal govt. would intervene to freeze accounts or severely limit cash withdrawals, but I'm not sure just how that would work or what the probable consequences would be. (Ideas on this subject appreciated.) Questions include: When and how could the govt. unfreeze accounts, without triggering new runs? How would depositor confidence in the banking system be restored? And, of course, what happens to the stock market in the meantime? Do we have to scrape it off the floor? I'm enough of a rationalist to think that there must be a rational way out of this idiotic mess, but those Gallup poll numbers do not give me heart.

In short, I often find that I worry considerably less about Y2K per se and a lot more about the way Y2K (with its attendant uncertainties, fears, and crowd psychology) will intrude itself into a highly vulnerable economic and financial situation. I don't expect PBS "Frontline" to take up these troubling Y2K-related issues, of course (thankfully, I suppose, the show will probably be limited to talk about stock valuations, with a smattering of opinions pro and con from selected analysts and economists, and maybe a few insidious and titillating comparisons to the 1929 market), but it will be hard not to watch the program without these worries haunting the back of one's mind.

-- Don Florence (dflorence@zianet.com), June 27, 1999


Great post Don, I will be sure to watch "Crash" and the subsequent "Mother Of All Crashes..."

-- Andy (2000EOD@prodigy.net), June 27, 1999.

Thanks Don, interesting that they picked the day that the FOMC (Federal Open Market Committee) meets to discuss raising interest rates. Some say it is a given that these rates will be raised, the only question is by how much.

Last fall Greenspan lowered rates by 1/4 point three times in order to keep the market afloat. This may prove to be the one of the most egregious errors ever committed by Greenspan.


-- Ray (ray@totacc.com), June 27, 1999.

Great Post!

The volume on the stock market has been low lately. According to the gurus on CNBC, a lot of people are sitting on the sidelines. I wonder how many are sitting there because of Y2K? I am!

-- GeeGee (GeeGee@madtown.com), June 27, 1999.

I totally agree with everything said above. In addition, I'd like to bring up the "miracle" of e-commerce, which has played such a large part in bloating the stock market. What happens to e-commerce when people don't have the huge amounts of highly discretionary income that they do now? Priceline.com may do OK, but a lot of these sites, banner ads etc will I think just be ignored.

-- Peter Errington (petere@ricochet.net), June 27, 1999.

Good summary, Don.

Now could you just go across town and bop al-d on the noggin for us?

-- save (our@forum.please), June 27, 1999.

I was thinking the information about Y2K would become widely available in September and people would buy out the stores then, but now I wnder if it won't be sooner with the upcoming CBS series, depending what is said on there. One of the most ominous indicators of the extent of Y2K has been the television broadcasting silence on it. Yes, I'm very nervous of the panic that will come when the media starts to chatter. In re the stock market, I am three-fourths out. I had long-term lovely investments left by my parents--the Bell stocks-- which are now sold. I still have some money in, which I will get out even at a loss. I never thought I would be one of those goofballs carrying a big sign saying, "Prepare now, the end is at hand". Never say never. .

-- Mara Wayne (MaraWAyne@aol.com), June 27, 1999.

Thank you for the post, Don.

I work for a broadcasting company and I predict that we will be seeing more and more of these type of documentaries in the near future. In November, there is something called "November Sweeps" where the networks put on the most alluring programming possible. As you know, politicians, broadcasters and Nielson ratings love a good crisis. November sweeps should prove to be very interesting this year!

P.S. I'm new to this forum and I think that it is wonderful.


-- Carolyn Grace (grace17@pacbell.net), June 27, 1999.

Welcome aboard Carolyn, please fasten your seat belt.


-- Ray (ray@totacc.com), June 27, 1999.

Hi Carolyn,

As Ray says, welcome aboard. Your input appears to be very valuable.Don't worry about any incoming flames you may receive. We have all lived through them. Good experience for the coming Solar Cycle!:>

-- Moore Dinty moore (not@thistime.com), June 27, 1999.

The PBS Frontline area is linked here...

http://www.pbs.org/ wgbh/pages/frontline/

Coming Soon:

Next week FRONTLINE explores the global crisis that began as a real estate bust in Thailand and roared through the world's economy-from Bangkok to Jakarta to Moscow to Wall Street. On August 31, 1998, the Dow Jones industrial average plunged 512 points, wiping out stock market gains for the entire year. In the United States, small investors watched more than half a trillion dollars of their savings disappear. Fear spread that the global economy was falling apart. The program gathers some of the world's leading financial analysts to unravel the reasons for the crash of 1998 and to predict whether-and when-it will happen again.

-- Diane J. Squire (sacredspaces@yahoo.com), June 27, 1999.

Thanks to all and sundry for their comments.

Re Internet stocks: yes, that bubble may be starting to burst. "Barron's" ran a critical piece on Amazon.com recently (one of my favorite websites!), and the other day Michael Bloomberg, the founder and CEO of Bloomberg Television & financial news services, absolutely excoriated Internet companies during a conference in the Far East (Singapore, I think). He basically said that few of these e-commerce companies will make it in the long run; many right now exist primarily just to sell stock--they are not really "businesses" at all. (You had similar, though smaller, speculative bubbles and game-playing when radio and television first came along.) I really do think that the Internet is a revolutionary way of disseminating information and conducting business, and eventually it will hold rich business rewards for the best companies. But right now the entire situation reminds me of the Nevada silver strikes in the 1860s. The Comstock Lode in Mt. Davidson (at Virginia City) was indeed a tremendously rich vein of silver ore--but once the major mining companies each got so many "feet" of the vein and had it locked up, other miners took to blasting "discovery holes" and sinking shafts here, there, and everywhere near (but not on!) the Comstock Lode: these were "wildcat" mines, for which shares were sold to speculators, especially in San Francisco. These mining stock certificates, hopelessly inflated in value, were everywhere; people would give them away to friends and acquaintances on the street. Mark Twain, who for a couple of years was a reporter for the Virginia City "Daily Territorial Enterprise," had a trunkful of these shares and he was worth, on paper, at least a million dollars (or so he claimed in "Roughing It"!); then the bubble burst, and he had a trunkful of worthless paper. That's how these things usually go, sooner or later.

Thanks, Diane, for the summary of the upcoming PBS program. I started following the Asian financial crisis in Sept. 1997, after the devaluation of the Thai bhat on July 2nd had prompted regional waves of currency devaluations. The whole Asian financial crisis was a classic, almost textbook, example of boom and bust--though not foreseen by very many economists, apparently, and its true severity was denied for some time by Camdessus and Fischer of the IMF, and by Rubin and Summers of Treasury. There has been a considerable rebound in stock markets across the region since last fall, fortunately, but if you look at the economies of Thailand, Indonesia, S. Korea, etc., there are still serious problems: financial meltdowns of that magnitude are not resolved in a few months. There are plenty of scars. The enormous banking problem in Japan is still the major worry over there, of course: roughly $2 trillion U.S. in bad loans.

Asian countries are very anxious to woo back and retain foreign investors (the massive withdrawal of foreign capital at the first real scare made the Asian financial crisis that much worse), which makes it difficult now to assess the reliability of some of the Y2K reports issuing from various countries over there. I get vertigo trying to figure out just where Japan is on Y2K, though (at least on my better days) I prefer to believe the more optimistic assessments!

In my happier moods, I also prefer to think that Y2K itself won't be all that big a fire in the U.S. What bothers me, though, is that this fire might be burning near a keg of gunpowder.

-- Don Florence (dflorence@zianet.com), June 28, 1999.

Think globally Don, globally, if they go down, we go down.

They are going to go down...

-- Andy (2000EOD@prodigy.net), June 28, 1999.

A very big thank you to one and all for your extensive contributions to this forum. I work in the financial markets, so I don't have a lot of time to search for info' or start a thread. I have been an avid reader of the forum for the last couple of months and I must say that many of the postings have proved very useful information for me and my clients.

You wrote about frontline Don, THIS FORUM IS THE FRONTLINE! - well done. By the way, you might have noticed that the brokers and the government organising the float of Telstra Mark 2 in Australia are anxious to put this $8 billion international deal away before October - and Y2K is given as a reason - quote "liquidity might dry up in the 4th quarter due to Y2K"

Anyway - it's fairly obvious now isn't it? ... Telstra and every other corporate around the world thinking about a capital raising this year are going to bring their plans forward to the 3rd quarter?

As we say in the small broking firm that I work for in Sydney. Mind how you go and stay tuned.

Best wishes and hugs to all


-- Pamela J Lawrence (p_lawrence@hermes.net.au), June 28, 1999.

Some of the regulars will be doing a real-time chat conference on the state of the markets tomorrow (June 29) at 9 PM EDT. Email me if you are interested in participating.

-- BigDog (BigDog@duffer.com), June 28, 1999.

Thank you to the new contributors on this subject and in the forum. I hope you continue to contribute, especially in the areas of media coverage.

-- ariZONEa (desertsouthwest@AZ.com), June 28, 1999.

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