Nasdaq reflects road to '29 crash, analysts warn : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Posted at 10:52 p.m. PST Saturday, Dec. 23, 2000 aolnf usatodayql

Nasdaq reflects road to '29 crash, analysts warn AS INVESTORS SEEK A RECOVERY, BEARS LIST SIGNS OF TROUBLE BY JENNIFER BJORHUS Mercury News

When stock trading resumes Tuesday for the final week of the year, nervous investors will find out whether a rally among technology stocks can reverse this year's long, nightmarish slide.

Since its peak last March 10, the technology-heavy Nasdaq composite index has dropped 50 percent, the second-sharpest plunge in Nasdaq's history and comparable to previous market crashes, including the New York Stock Exchange's crash in 1929. Even though bargain-hunters drove the Nasdaq up 176.90 Friday to close at 2,517.02, it is still down 38 percent for this year. By comparison, the blue chip Dow Jones industrial average is only down 7.5 percent for the year.

And there are enough dark clouds on the horizon to justify continuing worries: historically high debt levels, rising natural gas prices, the electricity troubles in California, a slowdown in corporate spending on information technology, a financial squall among telecommunications companies and signs that venture-capital funding may start a decline.

Call it the revenge of the bears.

``We're in the early stage as far as the unfolding financial dislocation in this country,'' warned Doug Noland, a financial-markets strategist for Dallas-based David Tice & Associates, which runs the Prudent Bear Fund.

Noland, other bearish analysts and economists argue that the information technology boom has largely been driven by an explosion of easy lending. ``The excesses during this period make the Roaring Twenties look small,'' Noland said. ``We have borrowed unbelievable amounts of money, we've consumed it, we've wasted it and now we're in a real pickle.''

Wells Fargo Bank's chief economist Sung Won Sohn charted Nasdaq's rise and fall since 1991, compared it with the Dow Jones industrial average before the Great Crash of 1929 and found what he called a ``scary similarity.''

People went `loony'

``Both situations reflect highly overinflated stock-market bubbles,'' said Christian Weller, macroeconomist at the Economic Policy Institute in Washington, D.C. ``People were just going loony.''

Then, just as now, the country had been hitting on all cylinders, with tremendous growth led by a dominant sector. Like information technology now, the automobile was the technical wonder of the era. The auto industry and its entourage of chemical, steel, leather and rubber suppliers were fueling an economic boom. And like shoppers wielding plastic cards today, people then were snapping up autos and household goods on the newfangled installment loans.

There was great uncertainty about how to value companies appropriately, because of new technology. Not only was there the auto, but electricity and radio spawned companies like RCA and General Electric.

New investors flooded the financial markets. Now, it's the middle class with 401(k)-style pension plans. Then, it was women, according to Gavin Wright, chair of the economics department at Stanford University and researcher at the Stanford Institute for Economic Policy Research. He recalls a Ladies Home Journal article from August 1929 titled, ``Everybody Ought to Be Rich.''

``I really think there are remarkable parallels, not just in the overlay in graphs,'' said Wright.

Wright's not alone. Michael Mandel, an economist and economics editor at Business Week magazine, has argued in his book ``The Coming Internet Depression'' that information technology amplifies the business cycle in a way that policy-makers may have trouble understanding and managing properly.

In the 1920s, he points out, there was a fall in the leading economic sector and a lag before that rolled out into the broader economy. Auto stocks peaked in April of '29 and the market collapsed in October, he says. Only later did the economy unravel into the Great Depression.

``It actually took another year after that before people realized how deeply they were in trouble,'' Mandel said of the Crash of 1929. In the midst of it, Americans thought they were in a soft landing.

But this raises a key question: How will a market plunge like Nasdaq's affect the modern economy? There, history is less of a guide because so much has changed since the 1920s.

The service industry, which varies less through economic cycles, is far more important today than in the 1920s, when much of the U.S. economy was agricultural. There is federal deposit insurance today, unlike in the 1920s, when frightened customers made runs on their banks to get their uninsured deposits backs.

Economists also point to other stabilizing influences: a larger, wealthier middle class; a Federal Reserve that is more sophisticated in intervening to prevent an economic disaster; and policy-makers who understand the dynamics of international trade better.

John Lonski, chief economist for Moody's Investors Service in New York, remains optimistic that there's no economic recession on the horizon, in spite of the stock market's decline. Evolving Internet technology and interest-rate cuts should keep the economy from tanking, he argues. While the Fed's interest rate cuts won't be the same shot in the arm that they were in 1998 and 1999, he thinks they should be enough to trigger decent expansion next year.

However, even bullish economists have no trouble pointing out dark clouds on the horizon that could turn the soft landing into something worse. Here are just a few:

Telecommunications sector problems: John Lipsky, chief economist at Chase Manhattan Bank, worries that financial troubles among telecommunications companies could seriously undermine the whole high-tech sector and reverse the investment-spending boom of the 1990s. He also worries people will get paranoid enough to stop shopping and save. ``That's sort of what happened in Japan in the 1990s,'' Lipsky said.

Credit crunch: Harvey Rosenblum, senior vice president of the Dallas Federal Reserve Bank, said his main dark cloud is that banks and other lenders will tighten up and create a credit crunch, stifling further technology investment and growth.

Weak stimulus: Lonski's single biggest worry is that policy-makers won't be able to stimulate the economy through the lull, although he thinks they will.

Rising energy prices: As for Sohn, his darkest clouds are the prices of natural gas and electricity, the concern that all the interest-rate hikes in the past two years were too much, and that struggling countries such as South Korea or Argentina could trigger some kind of external shock to the economy.

Applying doom and gloom

With business still rolling on in Silicon Valley despite the dot-com collapse, Bay Area residents may be wondering how all the doom and gloom applies to them.

Mandel and others say they're not surprised that Silicon Valley hasn't yet felt any overwhelming slowdown. For one, stock-market impacts in the larger economy aren't always immediate and direct. For example, the Federal Reserve Board of San Francisco this year studied the impact of high-tech stock-option wealth in the Bay Area. It concluded that a 10 percent increase in the stock-market valuations of local high-tech companies leads to a just a 1 or 2 percent increase in house prices over two years.

The valley has been somewhat cushioned by extraordinary venture-capital investments for the past year and a half, Mandel argues. Historically, says Mandel, it takes a year after major stock-market declines for venture capital funding to shrink.

Mandel's forecast for the valley: ``At some point in the middle of 2001 you're going to have a real slowdown in venture-capital spending and that's the point where it's going to hit Silicon Valley.''

-------------------------------------------------------------------------------- Contact Jennifer Bjorhus at or (408) 920-5660.

-- Carl Jenkins (, December 27, 2000


Yes Sir, things are much different than the "20'S". Leveraged investiments are at rates where the gods would fear too tread. The long term problems of petroleum, natural gas, and electricity are already set by the product left in the earth, and it's on the down hill slide (prices will not come down). Federal deposit insurance is a farce with less than 1.5% capitalization, only in some fairy tail your mother told you at bed time, could these things be called "dark clouds on the horizon"

-- Lee Blocher (, December 27, 2000.

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