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Link Y2K doomsayer now thinks it will cause only a six-month recession

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By FINN BULLERS and DAVID HAYES - The Kansas City Star Date: 11/11/99 22:15

Ed Yardeni is mellowing. But only a little.

The economic doomsayer of Y2K, who only six months ago was predicting a yearlong global recession caused by the year 2000 computer problem, now thinks Y2K will result in only a six-month recession.

Yardeni, chief economist for Deutsche Bank in New York City, made the prediction Thursday at a luncheon session of the Kansas City Society of Financial Analysts.

Yardeni is predicting a "very intense recession" that will spark a 25 percent to 30 percent drop in the stock market early next year -- to "8,000 on the Dow."

"I still see a 70 percent chance of recession. I'm just not as concerned about a 12-month or longer recession. The bulk of it will be concentrated in a six-month period, and it could linger for the second half," Yardeni said.

"I think there's enough to rule out doomsday scenarios, but not enough to join the `don't worry, be happy' crowd," said Yardeni, the most prominent expert predicting a Y2K-related economic downturn.

Yardeni, a prominent Wall Street watcher who was among the first economists to sound warnings about Y2K, has been focusing for the last year on what could go wrong in the next century.

"It's encouraging that so many people are so optimistic," Yardeni said. "Maybe I should join the chorus of complacency, but I'm skeptical."

Why?

Good data is hard to come by, he said.

Unlike other financial documents filed with the Securities and Exchange Commission by American corporations, SEC-required quarterly Y2K disclosures aren't audited or independently verified.

"I just can't buy into this universal trust," Yardeni said. "If that's the case, let's drop federal regulations and 10Q (quarterly financial report) filings and companies can say, `We did better then last year, trust us.'

"Never in the course of human history have so many of us depended on so many other humans not to screw up."

Federal Y2K watchdogs have made Yardeni stand out in the crowd with their glowing assessments of year 2000 readiness. For example, the White House this week issued its final Y2K assessment. For the most part, the report said, everything will be OK.

"I am confident the Y2K problem will not put the savings or the safety of the American people at risk," President Clinton said Wednesday. "The American people can have full faith that everything from air traffic control systems to Social Security payment systems will continue to work exactly as they should."

Wrong message, Yardeni said.

"Instead of preparing for plausible worst-case scenarios, government and business leaders have convinced the public to expect the best possible outcome," he said.

Yardeni concedes that a lot of progress has been made in the last year.

"So far, I have to say I haven't seen any Y2K behavior that's impacted the economy," he said. One of the biggest surprises, he said, is that Y2K-nervous investors haven't bolted from the stock market.

Domestically, Yardeni said he was encouraged by progress made in critical infrastructure systems such as electricity and telecommunications.

But with 49 days to go before Jan. 1, he expects to see a mad dash to the finish line. Yardeni thinks any number of things could go wrong.

"In the year 2000, my main concern is disruption in the supply chain," Yardeni said. "I believe there are going to be weak links."

A disruption in manufacturing supply lines could reduce production. That means recession.

But a disruption in just-in-time manufacturing isn't the only problem.

Y2K problems after the first of the year could cause investors to jump out of the market, causing the Dow to drop and depressing consumer spending.

Or there may just be a knee-jerk reaction. After Jan. 1, consumers may wake up and suddenly become conservative.

But the Achilles heel of Y2K could be the weak links in the global supply chain that might, he said, disrupt just-in-time manufacturing and petroleum production and distribution.

There almost undoubtedly will be Y2K problems in China, Yardeni said.

"Maybe we can work around those problems, maybe we can't," he said.

Another expected trouble spot, Indonesia, is a different story.

Indonesia provides the bulk of natural gas supplies to Japan and North Korea, and the response to Y2K from the Indonesian government is to simply fix problems as they crop up.

Italy is another spot that federal Y2K watchers are picking on because the country got a late start on fixing computer systems. But Yardeni points out that Washington only woke up to the problem last February.

In a wide-ranging talk in which Yardeni said he sometimes had trouble finding problems in the economy to worry about, he said he was amazed by those who equate talk of recession with the end of the world.

"I am concerned that the market is so much into this (rapid growth) that a six-month recession is viewed as doomsday," he said.

But Yardeni isn't all doom and gloom.

If the Dow does drop to 8,000, "I see some great buying opportunities on the way to 15,000 by the year 2005," he said.

Even so, Yardeni is covering his bets.

"I really hope we are lucky and nothing goes wrong. I really don't mind being wrong on this," he said. "I may have to do some dancing around at the end of the year and take some ribs, but I don't mind."

-- Homer Beanfang (Bats@inbellfry.com), November 12, 1999

Answers

To the top of new answers

-- T (top@top.top), November 12, 1999.

I don't know how he can essentially right off China, Indonesia, and possibly Japan and S. Korea and then say it's just a mild recession coming.

-- Dog Gone (layinglow@rollover.now), November 12, 1999.

Remember DG,

He hasn't had the benefit of hearing from T/D for the past several months.

All he can do is watch the spreads and the inventories.

Of course, we don't have the benefit of hearing from T/D anymore either. Bummer.

Hope you're feeling better.

-- nothere nothere (notherethere@hotmail.com), November 12, 1999.

Good point. BTW, right off=write off.

-- Dog Gone (layinglow@rollover.now), November 12, 1999.

"Never in the course of human history have so many of us depended on so many other humans not to screw up." 'Nuff said.

-- Dave (aaa@aaa.com), November 12, 1999.

>> I don't know how he can [...] say it's just a mild recession coming. <<

Quoting the article: Yardeni is predicting a "very intense recession"...

-- Brian McLaughlin (brianm@ims.com), November 12, 1999.