When Yardeni and Milne start singing off the same page ya gotta wonder!

Here's the URL for the PDF file:

http://www.yardeni.com/public/y_19990831.pdf

hotlink

By the way, the consummer publication Bottomline just published a paragraph making Yardeni sounding like a Polly on ecstasy. The first line, "The Y2K bug will have lasting positive effects."

Someone chain is getting yanked in a major way here.

-- Puddintame (achillesg@hotmail.com), September 01, 1999

Answers

To cut to the paraphrased "quote", look at the first full paragraph on page 2.

(Hey, sorry about three typos in three sentences, but you know the old joke about if you don't like my driving, stay off the sidewalk.)

-- Puddintame (achillesg@hotmail.com), September 01, 1999.

Puddintame:

Interesting document, but nothing new within. What led you to present this with the statement "It won't be long now" and the other that stated that Milne and Yardeni are "singing off the same page"?

-- Anita (spoonera@msn.com), September 01, 1999.

Anita, I'm sure there is a way to cut and paste pdf files and I'm just too ignorant. Anyway, here's basically what Yardeni says:

"Finally, I attempt to make the speculative bubble thesis more relevant by assessing the likelihood that y2k might be the event that bursts the bubble. I still think so. We won't have to wait much longer to find out of course. The end game has started."

. . . or, as Milne says, "Won't be long now!"

Anita, you can tell that Yardeni is overeducated. He takes about 45 words to say what Milne says in 4. I have a theory on writing that nobody who uses the word "burst" will ever be a successful communicator. Burst is one of the most awkward words in the language. I remember after an NBA finals game by the Lakers, Dennis Johnson said in the post-game interview: "We really burst our butts out there tonight!" I vowed never to use the word again if possible. Grammaticists be damned.

Yardeni had some stilted name for his piece. Milne, on the other hand, would have called the piece, "An Idiot's Guide To Bubble Busting" and you wouldn't have had to search long to learn his opinion that "It won't be long now!"

-- Puddintame (achillesg@hotmail.com), September 01, 1999.

By the way, overeducated or not, Yardeni is one of the smartest guys out there. It is quite newsworthy that on August 31 he still believes that Y2K is going to deflate the equity market.

-- Puddintame (achillesg@hotmail.com), September 01, 1999.

Star burst, star bright,

First sweet to eat tonight.

-- Randolph (dinosaur@williams-net.com), September 01, 1999.

Puddintame:

There is NO news in reporting that the stock market is due for a correction. Bubble-bursting is a nice catch-phrase, but there REALLY is a bubble in the market and it wouldn't take Y2k to bust it.

The differences between Milne and Yardeni (as I see them) are that Milne sees the bubble bursting and never recovering, where Yardeni sees the bubble bursting and immediately being rebuilt (reblown?) [grin] Recent predictions by Yardeni see this rebuilding as early as first quarter 2000.

I really like Yardeni and follow his T-X00 audio seminars. He'll have another this month some time.

-- Anita (spoonera@msn.com), September 01, 1999.

THE Y2K REPORTER

Greenspan, The Bubble, & The Y2K End Game

 Speculative Bubble

 What If Y2K Is A Nonevent?

 Y2K Inventory Cycle?

 Y2K Is Widening Trade Deficit

 Greenspan & The Bubble

GREENSPAN, THE BUBBLE, & THE Y2K END GAME

Speculative Bubble. Since the start of the year, Ive argued that the bull market in stocks was turning into a speculative bubble. I must admit that this insight is a cop out for an investment strategist. It is a bears way of remaining bullish: Im not sure how much higher stock prices might soar, but they will eventually crash. Not a very useful outlook.

Ive tried to add some value to the speculative bubble thesis by measuring it. In my Topical Study #44, New, Improved Stock Valuation Model, dated July 26, 1999, I showed that according to the Feds Stock Valuation Model, the market is extremely overpriced and vulnerable to a significant fall. The model uses the markets earnings expectations, not mine. I argued that the markets expectations are unrealistically optimistic. If so, then the market is even more overpriced.

In my follow-up Topical Study #45, Earnings: The Phantom Menace (Episode I), dated August 16, 1999, I examined a related problem. Many companies are overstating their earnings by using questionable accounting and financial practices. Some are significantly overstating their profits, and they tend to have the highest valuation multiples in the stock market.1 This suggests that investors recognize that earnings are manipulated, and are willing to play the numbers game as long as management can keep it going. The investment conclusion is trivial, and not very useful: The market will continue to go up until it doesnt.

Finally, Ive attempted to make the speculative bubble thesis more relevant by assessing the likelihood that Y2K might be the event that bursts the bubble. I still think so. We wont have to wait much longer to find out of course. The end game has started.

What If Y2K Is A Nonevent?

Notwithstanding my stance on Y2K, more and more investors are asking me, What if Y2K is a nonevent? No one will be happier than I will if Y2K is a nonevent. My Y2K recession outlook is one that I would be happy to sacrifice to the forecasting gods.

Ive set up Y2K Behavior Monitor on my web site.2 This collection of charts tracks the economic indicators that should detect any significant changes in consumer, investor, and business behavior as a result of Y2K. So far, not much is happening. Ill be especially interested to see what happens to currency demand as we approach the new millennium.3 Currently, the currency component of M1 is up 10.3% from a year ago, which is up from a 1996 low of 2.5%, but comparable to the growth rates of 1993 and 1994 (Exhibit 1 on page 3).

Ive addressed many audiences over the past two years about the Year 2000 Problem. Often, at the end of my talk, I ask them if they believe Y2K will be a major or minor problem. Invariably, over 80% of the room raises their hands in favor of the minor position. Then I ask them if they intend to have some extra cash by the end of the year. Invariably, more than 80% of the crowd votes for an extra stash of cash.

I am not nownor have I everadvised folks to take money out of the bank. I have suggested that they might open another checking account at a second bank if they are concerned. The Federal Reserve plans to have $200 billion in currency available over the rest of the year just in case there is a Y2K demand for cash. There are 100 million households in the United States. So there is enough cash to go around if each household decides to hold an additional $2000, on average.

If nothing happens early next year, then there could be lots of folks with extra cash and extra boxes of spaghetti that werent necessary. They will eventually eat the pasta, but what will they do with all the cash? They could put it back in their bank accounts. Or else they might be so relieved that nothing terrible happened that they would spend it all. In this scenario, the forecasting gods would not just discredit, but rather totally demolish my Y2K hallucinations. Instead of a Y2K bust, there would be a Y2K boom. Since the global economy is already showing lots of signs of a synchronized rebound, it could become a global synchronized boom next year. The universal sigh of relief would inject even more hot air into the speculative bubble in stocks.

In this Runaway Bull scenario, the Dow might soar to 15000 by 2001, well ahead of my 2005 target. There would be no Y2K bear market. The resulting wealth effect and euphoria would fuel a spending boom that could finally revive price inflation. The Fed would then be forced to resume tightening with a series of rate hikes.

In this Y2K-is-a-nonevent-scenario, I am assuming that the stock market is already in a speculative bubble, which would get even bigger. If Y2K doesnt burst the bubble, then it will get bigger until the Fed does so. Of course, rate hikes in response to an economic boom is the traditional path by which booms become busts and bull markets become bear markets.

Y2K Inventory Cycle?

I always said I expected to see lots of Y2K progress, and there has been, and continues to be, lots of progress. Ive also noted that my focus hasnt been on the good news, but rather on the bad news. I would back off of my recession forecast if I found much less bad news. Almost everyone else with an opinion on Y2K is optimistic because they are finding more good news, and are either ignoring the bad news or assuming it will go away by the end of the year.

When economists analyze the possible economic impact of Y2K, they nearly all expect that inventory building will boost fourth quarter economic growth, and then dampen it during the first quarter. But the quarterly growth impacts are expected to be minor both up and down. Economists generally believe that Y2K will have much less impact on consumer spending than on inventories.

I see the reverse happening. There is bound to be some inventory building over the remainder of the year, but maybe less than widely predicted by economists. And the inventory building may not be strong enough to offset weaker consumer spending on nonessentials like cars, furniture, and houses during the final three months of the year, in particular. Distributors inventories are up $37.6 billion over the past 12 months through June. But, this is almost all attributable to the auto sector. Manufacturing inventories were actually down $3.4 billion from a year ago at midyear (Exhibits 2 and 3).

I expect retailers and wholesalers will stock up for a possible year-end buying surge for consumer staples. But manufacturers are not likely to build major precautionary buffers of raw materials, supplies, and components. Doing so could be just as risky as doing nothing. If Y2K is a nonevent, there is no point in additional stockpiles. If it is a major event, there might be a recession and less demand for manufactured products. A management decision to stockpile for Y2K disruptions raises lots of unanswerable questions.

1) How many days, weeks, or months of extra inventory should we have?

2) Do we stockpile everything or just the inputs from vendors that are most likely to experience Y2K problems?

3) Where will we put the extra inventories?

4) How will we keep track of just-in-case inventories when our IT systems are all designed for just-in-time operations?

Y2K Is Widening Trade Deficit.

The widely held notion that Y2K might boost economic growth over the remainder of the year ignores that manufacturers and distributors are most likely to stockpile imported goods from overseas vendors that are perceived to be most at risk. The trade deficit could widen dramatically in this scenario.

Indeed, it may be doing so already. In June, the merchandise trade deficit was $30.0 billion, the widest monthly shortfall on record. Imports are up 15.1% over the past year, while exports are up only 1.1% (Exhibits 4 and 5). Leading the import-binge is the high-tech sector, particularly the computer and telecommunications sectors (Exhibits 6 and 7).

Could it be that US purchasing managers are hoarding these products just in case Y2K is a problem?

Of course, if the main source of just-in-case inventories is imports rather than domestic production, GDP would get much less lift over the rest of the year than predicted by the consensus of economists.

Greenspan & The Bubble.

The bottom line is that if Y2K doesnt burst the bubble, then Mr. Greenspan will have no choice but to do so, even though he has been rather ambivalent about the role of the Fed in managing a runaway bull market. As Jacob Schlesinger observed in the August 30, 1999 issue of The Wall Street Journal, the Feds bubble policy is to watch it rather than to pop it. Alan Abelson noted in the August 30, 1999 issue of Barrons that the very act of watching can influence the market. He recalled the famous uncertainty principle of physicist Werner Heisenberg: In rough translation, that principle posited that certainty in scientific quest will always be compromised because the very act of observation alters whats being observed

I believe that Mr. Greenspan has helped to inflate the speculative bubble by making it increasingly clear that the Fed wont raise interest rates as long as the inflation rate for goods and services remains tame, even if equity prices continue to inflate at a rate that may be excessive. Investors were first spooked by Mr. Greenspans irrational exuberance comments on the stock market on December 5, 1996. But, theyve learned that Mr. Greenspan is just thinking out loud about the valuation of earnings in the market, not setting us up for a bubble-bursting tightening.

In recent speeches and Congressional testimonies, the Fed Chairman has made it clear that if the bull market is a speculative bubble and if it bursts, the Fed will ease policy quickly to minimize the damage. In other words, the Fed is a friend to stock investors. Monetary policy wont stand in the way of the runaway bull, but it will be ready to tame the bear. Rather than simply watching the bubble, Mr. Greenspan is helping to inflate it. If Y2K is a nonevent, then the bubble could get much bigger. The wealth effect could fuel an even greater spending binge. The labor shortage would force companies to raise wages significantly. Im a secular disinflationist, but even I would conclude that price inflation could rebound in such a scenario. Then the Fed would have no choice but to tighten, and burst the bubble sometime in 2001.

Y2k Y2k Y2k Y2k Y2k Y2k Y2k Y

-- I was never here (I never@posted.this), September 02, 1999.