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Summary and Comments

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Category: 

Stock_Market

Date: 

1997-06-30 00:00:00

Subject: 

An Optimist: Dow 4000, 5-Year Recession

Comment: 

I think you should be aware of programmers and professionals in the y2k repair field who think things will be much less catastrophic than I do. Don Estes is such a person. As he says, he is more optimistic than Peter de Jager, and Peter is more optimistic than I am.

I don't think you can have a recession that drops the country 5% and expect the Dow Jones to stay as high as 4,000. This bubble could not take a 5% hit to the economy and not collapse.

Note, however, that Mr. Estes allows for a worse scenario. This is his best-case scenario.

* * * * * * * * * *

Date: Thu, 26 Jun 1997 18:42:25 From: Don Estes

What I have suggested is that people look at each economic entity as a node, and consider the degree of coupling between nodes. For example, there is a high degree of coupling between suppliers and manufacturers in the modern manufacturing sector, but there is a low degree of coupling across the broad economy. Government as we know will largely be a basket case; what's the current guess, 20% compliance anyone?

So, let's take some broad brush assumptions:

- Due to interruptions in the food chain, manufacturing takes a 50% hit in the USA for 6 months. - Government is largely off-line which, despite those of us who are disposed to think this a good thing, will mean massive disruption in the flow of redirected (I did not say misdirected) money. - Forget smaller hits in the service sector for now.

OK, for back of the envelope purposes, manufacturing is very roughly 20% of the USA economy, and government roughly the same. So, take out 10% for manufacturing and 15% for government, and we are talking about a 25% drop in total monthly GNP at peak. Assuming manufacturing is mostly back on-line by end of 2000, and government by end of 2001 or so, we're looking at -15% growth for USA for 2000, and beyond that, who knows? Probably 2005 before we come completely out of the recession.

Remember, 1929 to 1935 was -35%, and we peaked at 25% unemployment then.

However, for every perturbation there are restoring forces, us, in this case, trying to contain the damage and find more fingers to plug the dyke. So, maybe it will only be -5% or -10%, but it could also be -20% or -25%. My personal bet is -5%, with a few core meltdowns here and there.

Prediction: the market will take fright and plunge out of equities, selling at prices that are below economic fundamentals. My mark in the sand is DJ 4000. But then Peter thinks I am a wild-eyed optimist, too.

Financial strategy: get out of equities by end of 1997, move into carefully managed short positions (which I am not competant to do) or buy gold (which I might manage, a bit), ride the shorts and gold to their highs, and buy back into equities carefully at the market bottom. Simple, really. I wish I understood how to do it. I just know bits and bytes.

Oh yes, this is leaving out the effects on embedded systems. I am following research into the electrical grid, which could go into oscillation and burn out all the electronics in the country at midnight. I would recommend that everyone unplug at 11:00 p.m., except that I might be causing the problem I want to avoid. So, all of you stay plugged in; I'll be running my generator. The computers will be off.


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