Gary North's Reality Check...lotsa reading, but says it all : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Gary North's REALITY CHECK Issue No. 44 December 16, 1999


Planes will not fall from the sky. That's because they will be on the ground. Nobody wants to fly. Airline after airline has cancelled its December 31/January 1 flights. Not enough demand. The best and the brightest say that y2k will be a non-event, but they are not booking flights. There is a lingering doubt about y2k. Nobody wants to talk about it.

According to a recent report, 25% of mutual fund money assets are now in cash. A friend of mine found this statistic cited on the December 14 Market Update & Commentary of the PIT BULL investment service (Henry Ford's). Ford thinks that Y2K will be a non-event. If brokers' phone lines are still open on January 3, he says, expect a wild boom, as this cash comes back into the stock market.

Is this really possible? A boom beginning on January 3? Well, if Y2K fears are really the main motivation behind a few percentage points of the supposed 25% of mutual fund assets that are in cash, it's possible. Investors could decide that the worst is over; therefore, everything bad is over; therefore, "Buy!" But is Ford's assessment accurate?

Tony Sagami, one of the nation's leading experts in mutual funds, says that the cash component of stock mutual funds is at an all-time low. Stock fund managers are betting the farm on the bull. He thinks it's a risky bet at this stage of the boom. So do I.

So, where is the 25% being held? By whom? The latest data that I can find are for October. Money market funds had $1.3 trillion in assets. Total mutual fund assets were $6.2 trillion. The cash component was 21.7%. A year earlier, the respective figures were $1.2 trillion and $5.5 trillion, or 21.8% -- essentially the same. See:

This indicates that the public has decided to hold about 22% of its mutual fund assets in cash. This percentage may be a little higher, given the fact that some assets in the other types of funds are near-cash assets.

The question is: Will good news -- no meltdown -- by January 3 produce a mad dash to convert cash to stocks? Have investors been so fearful of Y2K since late 1998 that they will unload T-bills and buy stocks on January 3?

In March, the nation's mild Y2K fever broke. Since then, there has been little public concern about Y2K. Yet the change in opinion by, perhaps, 2% of the population on the margin has not led to a measurable shift into stock mutual funds.

What I find difficult to believe is that there are tens of billions of dollars invested in short-term money- market funds that will be shifted into stocks in the first week of January because of reduced Y2K fears. To believe this is to believe that significant assets were moved out of stock mutual funds into money-market funds as a hedge against Y2K. I see no evidence of such shift, late 1998 to late 1999.

Are U.S. investors really worried about a major break in the U.S. economy as a result of Y2K? Where is the evidence? What I see is apathy on a massive scale.

If you are using the Ursa fund in the Rydex family of funds to short the market, you know you're positioned for trouble in January -- worse than expected. If we get only minor disruptions in the first week, we could get a market surge, but I do not see how this by itself would produce a sustained rally.

For maximum safety in digital fund investing, you should be in a money market fund on December 31. Shorting this market is for those who think that Y2K will be worse than expected -- my view. But in the first two weeks of 2000, if there is no major disruption, then marginal money could go into stocks.

Let's see how the final week in December goes. I think Y2K fears will push the stock market down. If these fears are intense, the rebound in January, if any, will not be spectacular. But if the stock market is moving up on December 29, you may want to move from Ursa to a money market fund for a few weeks.


Fact: the fundamental problems of Y2K must be solved. They have not been solved so far. There has been no testing. Fix-on-failure has become the watchword.

If the embedded chips collapse the system over the weekend, then electronic money will be at risk. You may be on the right side of the stock market transaction (short), but the institutions on the other side may not be able to meet the margin calls. You lose.

If things get by over the weekend, you could be on the wrong side, at least for a while. But I think the boom, if any, will not last long. The noise produced by Y2K will overwhelm systems.

My view is simple: my money should be in things, not digits. I am not in stocks for all of the conventional reasons, such as incredibly low earnings. This market is old, and it's into the irrational stage. People buy because they think they will make double-digit returns indefinitely. When everyone is an optimist, I remain on the sidelines. When a book predicting a Dow 30,000 finds buyers, I am a seller.

Y2K in such matters as oil imports, railroads (coal shipments), and international flights will still threaten the supply of goods even if phones are basically compliant and electricity stays up on January 1. The banks may not be into cross defaults in the first week of January.

Remember, it takes time to spread bad data. It takes time for bad data to be recognized as such by users, and then isolated to see where it's coming from. Good news on January 3 will mean only that the information-degradation effects have not had time to corrupt all systems.

We have to make decisions now. We face blind public optimism on all sides. We are swimming against the tide. The best and the brightest think we are wrong. But they are also proponents of investing in stocks at the end of a long boom, when the dividend return in stock mutual funds is under 2%.

The Federal Reserve System is pouring in money -- the highest rate on record. It is doing this to get the banks over the Y2K hump. Everyone accepts this. Investors believe that electronic money can solve problems created by broken code. They look at the increase in money and conclude: "This is only for a few months." But the dislocating effects of monetary inflation are real, whatever the reasons justifying it.

When it stops -- and Greenspan will stop it if Y2K does not immediately cause problems -- then the slowdown will create negative ripple effects. The boom-bust cycle cannot be avoided forever. (Ludwig von Mises, HUMAN ACTION, chap. 20).


As far as any self-published document goes, almost every organization on earth is Y2K-ready. This is true of every government, too.

Most organizations are saying nothing -- a wise policy, I suppose. But those that say anything are optimistic.

As far as I can see, every government that has been singled out by the U.S. State Department as being behind has protested. All national governments are ready. It does not matter when they got started. They are all ready.

How? How did they do it? Where did they get the personnel?

What we are facing as decision-makers is a barrage of official reports that inform us that there is no Y2K problem in their domain. The problem is with The Other Guy Over There.

Within any industry, there is some trade association that speaks for most members. From these, we learn that only small organizations are facing Y2K problems. The big boys are on track.

As for testing, we hear almost nothing. A few tests suffice to provide a clean bill of health. There is nothing on parallel testing of systems over several months.

As for data exchanges, we hear almost nothing. Extensive tests are nowhere visible. In the financial services industry, which is supposedly the most advanced in its preparations, there were a few minimal tests among a handful of the largest organizations a year ago. These are all that underlie the "no problem" announcement.

As for embedded chips, we hear only a few voices calling for extensive testing. We are told that this used to be a problem, but the problem was exaggerated. The 50 billion chips are mostly all right, except for one percent (500 million) or two-tenths of one percent (100 million). Those failures will be minor. They will be fixed on failure. They can be re-set manually. As for the effects of 100 million failures, this is not worth discussing. As for how long it will take for certified technicians to fix 100 million failures, we are not told. No one asks. How many technicians are available to fix them? We are not told. I have seen no estimate.

And so it goes. The world is about to hit a digital wall, yet we are told that everything is at least 98% compliant. U.S. banks are 99.7% ready, the FDIC tells us. Japanese banks are 100% compliant, up from none last February, the Japanese government says. Impossible? Of course. But no one in authority says this in public.

It takes an act of will, extended over weeks and months in the face of government propaganda, to withstand this stream of propaganda. It is difficult for anyone to resist this barrage of propaganda. Almost no one does. What keeps me from becoming caught up in the optimism is this: I go on line every morning to post documents. Most of these documents do not verify the public's lack of concern. They may speak of 72 hours of problems, but I can still buy batteries at Wal-Mart. The public is not preparing for 72 hours of trouble.

Most people have made up their minds on Y2K. Most people believe it's nothing. Most of the others have never heard about it. So, we really are in the minority.

As I have said before, it's not the odds; it's the stakes. If you bet wrong, you literally could die. Even if you bet right, it's risky. If electrical power fails, either because of bad code or no fuel, then society falls. I have never said that the power must fail. Rick Cowles, whose judgment I trust, thinks the grid will survive. But he says it will be erratic. Blackouts and brownouts will be common.

My view is simple: I want verified evidence that systems are compliant and tested. But I can't get this. Neither can you. So, I must go on faith based on imperfect evidence. This leads me back to the extreme caution position. Why? Because the division of labor is digital, and the digits, as of today, are error-filled. The code is still broken.

How can people think that broken code will work as well as compliant code? How can they call this an information economy, and at the same time deny that incorrect information, worldwide, will create major disruptions? How can they cry out, "We can run it manually," when nothing has been run manually for a generation, and those technicians who ran things manually are long retired?

These are simple issues. They should raise a red flag. They do not raise even a yellow flag.


I spoke with a Red Cross official two weeks ago. He told me that if we get a no-water, no-electricity crisis for ten consecutive days, the Red Cross will simply collapse. The ratio of volunteers to staffers is over 40- to-one. The volunteers will go home to protect their families.

The typical Red Cross shelter is a high school gymnasium. It can hold fewer than 1,000 people. It must have electricity, flush toilets, and running water. How many high school gyms are there in your city? How many have signed an agreement with the Red Cross to house refugees? You don't know. I asked. It is probably fewer than half a dozen in a city of a million people.

People will have to stay in their homes. There will be no place to house them. The great threat is water. If they cannot flush their toilets, their lifestyle changes in a matter of hours. If the fire department cannot hook hoses up to functioning fire hydrants, fires will spread uncontrollably. A modern city without functioning fire hydrants is a tinder box.

Take away water for a week, and urban middle-class man's world ends. The public grasps none of this. People cannot conceive of a social threat to their supply of comfort, let alone their safety.

On December 10, we were warned in a press release jointly issued by the Natural Resources Defense Council and the Center for Y2K and Society that over half of U.S. cities have water systems that are not compliant. Worse, 85% of sewer systems have yet to be remediated. Within hours, a press release from the American Water Works Association assured us that all of our large cities are compliant.

You must decide who is telling the truth. It's very hard to protect yourself with 15 days to go. You can buy bleach. You can buy a 55-gallon drum to run a roof drain spout into. But will you? It looks goofy. Your neighbors may ask why.

If it was mandatory for every water utility to get compliant, then why is any urban resident confident that his city's utility has completed remediation and testing? Has he verified this? Millions have not. They trust the system. They are not interested in evidence. They are interested in avoiding change. The press release from the AWWA comforts them. Besides, most of them have never heard of the AWWA, nor do they think there is a problem.

If there were a fire that spread uncontrollably in a major city, where would the homeless be sent? It's winter. They cannot sit around on park benches. What would the authorities do with them? College dorms would be commandeered. Then hotels/motels. But what if there is no water, which is the reason why the fires spread?

We do not think of these problems because they cannot be solved within our comfort zones. People assume them away. But how valid is the evidence by which they are assumed away?


You have no doubt asked yourself this question more than once. Your answer is probably something like this: "Well, I'm not willing to bet my life on propaganda. I have to do something to protect myself." So, you have reallocated your portfolio. You have moved from digital assets to non-digital.

Non-digital assets can be sold back (gold, silver), or spent (currency), or consumed directly (food storage), or used (tools). The market for non-digital assets is less highly developed. Transaction costs for selling are higher. But these assets will not lose as much of their value in an economic breakdown as digital assets will. The risk of owning them is lower.

Maybe you bought a water purifier. So, use it. You bought a sophisticated first aid kit. Learn how to use it. You bought gold coins. You are now less dependent on a financial system based on promises of outfits that you know cannot be trusted.

You have moved from reliance on an extreme division of labor to a moderate one -- 1965-era, perhaps. You have lowered your electronic return, but you have increased your diversification and your safety.

You have done this rationally, examining evidence, possibly daily. Your critics have looked at almost no evidence, and they have continued to believe in an economy that produces supposedly low-risk stock market returns of 20% per annum.

The first phase of the worst-case scenario will be visible on January 1: a collapse of the grid. Markets will not reopen. By January 3, there will be no water in our cities. The embedded chips and bad code will have done their work. Anyone who says this cannot happen is kidding himself. The evidence is not there. We do not know what the systems that rely on chips will do. We do know what some of the chips will do: fail.

If we get through the weekend, then the debate moves to the domino effect: noncompliant small businesses, noncompliant suppliers, noncompliant banks, noncompliant everything else. Other systems will just get noisy: the busy signal phenomenon.

Then the spread of bad data will produce its effects. The scary one is a cascading cross default of the financial industry: banks, mutual funds, commodity futures, and derivatives. Remember, the world is integrated. Defaults can take place outside of Canada and the U.S.

The best and the brightest do not believe any of this will happen. But they are not scheduling flights on December 31, either. They are hedging their bets.

I am hedging mine. It's just that mine are more comprehensively hedged. I regard the financial world as a large noncompliant airport. I do not intend to be on a plane scheduled for one.

You are probably hedged somewhere in between. Each person has a comfort zone, and is married to someone with a different one. Compromises must be made.

Ask yourself: Given the evidence you have read, is the case for Y2K optimism stronger than the case for pessimism? You have read postings on my site and other sites. You have read newsletters. You have read press releases and reports based on them. One fact stands out: the code was broken all over the world in 1997. It has not all be fixed. Almost none of it has been systematically tested beyond rolling a date forward.

We are flying almost blind, but not so blindly as the general public.

The modern division of labor rests on digits. The deadline is fixed. The code isn't.

We have two weeks.

-- fatanddumb (fatdumb@nd.happy), December 17, 1999


Read this a few days ago, good post for those who missed it though. Definitely interesting questions, don't you think?

-- Michael (, December 17, 1999.

This is the eighth (or is it the ninth?) time this has been posted. Everybody who's anybody has it in their e- mail box already...and everyone else can read it on the first half-dozen threads it appeared in.

Can we all agree that it has been posted here ENOUGH times?

It's nothing personal, man.

-- semper paratus (, December 17, 1999.

From the beginning, Gary North made sense. He still does!

-- Don (, December 17, 1999.

[letting this one stand as it fits discussion HERE. # 3]

The real question ought to be: Has Scary Gary ever made a prediction about ANYTHING that actually ended up coming true?

Some examples of his many "wrongs"...

1. "Months before January 1, 2000, the world's stock markets will have crashed." (Paragraph 6).

2. "The exodus of programmers will begin no later than 1999." (Paragraph 5)

3. "The GPS rollover (to Jan. 6, 1980) on August 22, 1999, may create big problems for banks and bank wire transfers... My view: the banking system will be gone before y2k arrives."

4. "The Euro conversion is doomed. The deadline for stage one is January 1, 1999, and nobody has made it."

5. "Month by month, my former critics are moving my way. I'll be mainstream in a year." this one is especially funny... - 6-24-98

6. "In January, 1999, the Jo Anne effect will begin to take its toll. That's when corporate fiscal years start rolling into 2000." 8-29-98

7. "If the Jo Anne effect begins to create panic in the corridors of the corporate world, think of April 1, 1999, when the three major trading partners of the United States roll into fiscal 2000: Canada, Japan, and New York State." 8-29-98

8. Some major computer problems will begin in early 1999, growing worse in the fall of 1999. This gives us even less time to prepare.

-- Y2K Pro (, December 17, 1999.

Michael, thanks for posting this again. It ain't a pretty picture, but there's a grain of "potential" here that, IMHO, simply can't be ignored.

We're a dependent society, break any link out of our chain of living, and we're toast.

While I don't personally believe there will be some Big Bang on 1/1/00, I subscribe to the "death by a thousand cuts" scenairo. And, the media will cover everything up like cats in Kitty Litter.

-- Richard (, December 17, 1999.

Since Y2K Pro's post will probably get deleted, let me state that it brought up other predictions that Gary North made that did not come true, such as that the stock market would by now have been dead meat. The common denominator in all the predictions that Pro cited was on North's predicted REACTION OF PEOPLE to the upcoming Y2K problem. He figured that, by this time, the public at large would be worried big time.

The public is not worried. And broken computer code doesn't worry, either. It just fails or produces unintended results.

-- King of Spain (madrid@aol.cum), December 18, 1999.


you are of course right - but the main reason the market hasn't failed (left to it's own devices it would have burst by now) - is the FED and the PPT (Plunge Protection Team) interfering in the market and bailing out LTCM and Goldfilled Sacks with ***OUR*** MONEY!!!

-- Andy (, December 18, 1999.

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