Predictions for 2001

Like the Ghost of Christmas Future, I come to you today.

This is usually an exercise in self-humiliation. No one can actually predict the future. And, as there are an infinite number of things that might happen, the odds of guessing right are slim.

Still, actions have consequences. And sometimes those consequences are as obvious and predictable as what you might expect when you see a sumo wrestler strapping on his skates next to a lightly frozen pond.

That is what makes the Darwin Awards so entertaining. A reader can see what is coming – though the consequences of imbecility are invisible to the imbecile himself.

The most flagrant imbecility of the year 2000 was the absurd pricing of Internet and technology shares. An observer need not have gutted a chicken nor studied the stars in order to see how this absurdity would end. So, I do not expect any special applause for my prediction last year at this time that "the Rocket Chips will fall to back to Earth."

Since January of last year, the Internets have felt the earth’s gravitational pull and have lost 74% of their value. Many of them have already struck the ground or been burned upon re-entry into the Earth’s financial atmosphere.

Nor should I expect any measure of respect for my corollary prediction that the blue chips would do relatively better than the Rocket Chips, or "old economy stocks will outperform new economy issues," as I put it.

Sure enough, Dow stocks have held up pretty well – with only a 6.2% loss for the index. And many stocks suggested in these pages are up in value – most notably, Philip Morris, which almost doubled in value.

My other major predictions for last year were less obvious: I forecast a decline in "American Triumphalism" and a fall in the dollar. I said that "Main Street and Wall Street would converge." I suggested that gold, oil and natural resources would increase in price…and I probably predicted a few other things I would just as soon forget about.

But here we are, dear reader, another year older. Another year wiser…and, I hope, another year richer.

"All that really matters," said my friend and ex-neighbor Francois last night. "is your health. Everything else you can work out. But when your health goes – you’re finished."

Francois retired in September. Then, his back gave him trouble – to the point where, a couple of weeks ago, he could barely walk. Louisette’s hand required surgery, from which she has yet to recover.

"With a comfortable house, a big stack of firewood, and a big garden," Francois made a sweeping gesture with his hand to point out the features of his new life in retirement, "money doesn’t mean much to us. But health? Ah…that’s another matter…."

You may wonder why, dear reader, I interrupt this look into the future with this little vignette from my visit to Francois last night… It is only to keep things in perspective. This is the nice thing about making financial predictions – they don’t really matter.

So, recognizing that the predictions that follow are as important as they are likely to be accurate, I offer the following:

*** Last year, it was the tech and Internet stocks that got hit. This year, it will be the overpriced blue chips. GE, for example, will fall sharply.

*** Deflation, not inflation, will bedevil the markets and frustrate investors. Already, more than $3 trillion has disappeared from U.S. capital markets. This was wealth on paper that had no corresponding real economy parallel. There were no factories, no sales, and no profits to back it up. Even after the losses suffered by investors in the year just finished, there remains another $5 to $7 trillion in excess valuation on Wall Street. Unless the Fed can pull off another boom in the credit cycle, more of this paper wealth will be destroyed in the year ahead.

*** Stocks are still much too expensive. The Dow P/E is over 20. The Nasdaq P/E – even after getting cut in half from its high point – is still close to 100. Again, barring a successful credit boom – which is unlikely – the Dow should sooner or later sink below 6,000…and the Nasdaq should fall below 1,000.

*** The Greenspan Put will prove worthless. Greenspan will cut rates. And he will increase the money supply. But these efforts will be too little and too late to offset the effects of a deflationary collapse. Investors who borrowed on their homes in order to buy stocks last January paid a high price to play the market – a loss of nearly 30% on average. While not yet acting like Japanese, they will be more cautious in the year ahead. And businesses, too, will be reluctant to add capacity while inventories stack up in warehouses. The Fed Funds rates will come down. But the real return on borrowed money will remain negative for most borrowers. As a result, people will reduce their debt levels and begin saving.

*** The U.S. dollar will continue to decline against the euro. Against all odds, the euro will rise above $1 – and beyond. This will have a number of serious consequences. Overseas investors will withdraw funds from U.S. capital markets. U.S. dollar-denominated assets will fall in price. Prices of foreign goods will rise. And, the trade deficit will fall.

*** Genius will fail – derivative positions total about 10 times the entire U.S. GDP. Trillions of dollars are tied up in positions that are far more precarious than their owners think. Coming in 2001 – big bankruptcies. Expect major surprises from major players.

*** Bankruptcies and deflation will reawaken the inner child in gold – the golden boy of monetary stability. Gold will rise in price as investors become concerned about the dollar, financial institutions, derivatives and debt. More about this tomorrow.

*** Recession will begin before the end of the year and be worse than expected and more widespread. Along with Bush and Greenspan, globalization, deregulation, securitization, derivatization and laissez faire economics will be blamed.

*** Markets were closed yesterday – not much news to report.

*** The Dow and the Nasdaq ended the millennium on a sour note. Both were off on Friday – with the Dow down 80 points as the trading year came to a close; the Nasdaq was down 86.

*** The final week of the 2nd millennium saw a 1% decline in the Dow – putting the down in the red 6.2% for the year. But small caps rose 5% – leaving them in the hole only 4% for the year.

*** The Nasdaq dropped 4% last week – bringing the index down 53% from its high…and 39.3% for the year.

*** It was a bad week for Internets – a fitting end for what has been a bad year. TheStreet.com’s Internet index fell 6% last week, to leave the Internet sector with a 74% loss for the year.

*** Amazon.com, the best known of the Internet retailers, and a frequent subject of these letters, has fallen nearly 90% since Jeff Bezos got his mug on the cover of TIME. The stock was quoted on Friday at just $15.56. But even at $15, Amazon is probably greatly overpriced. Amazon – that great river of no returns – enters the 3rd millennium with no proven business model, no profits and more than $2 billion in debt.

*** It was a bad week for the big techs too. MSFT ended the year at $43.50. Cisco at $38.25. Oracle at $29.06 And Dell at $17.44. Readers will note that these are all much smaller numbers than those of the beginning of the year.

*** Not all stocks fell in the year 2000, however. Floyd Norris reports in the NY TIMES that 86% of stocks in the health care, finance, energy or utilities areas rose. But only 31% of those in technology or telecommunications managed to end the year in positive territory.

*** The DJ Utilities Index had a spectacular year – up 46%.

*** Analysts with major brokerage houses are almost universally bullish for the new year. A survey of 10 of the leading analysts reported in U.S.A. Today produced estimates of where the S&P 500 will end the year in a range from a low of 1400 to a high of 1715. The S&P 500 begins the year at only 1320. Not a single analyst was bearish.

*** Gold stocks fell 2% last week. I got a letter from tech maven Porter Stansberry urging me to reconsider my position on gold in light of the fundamental change that has taken place in the relationship between gold and money. Since the Nixon administration, says Porter, gold has not been money. And it doesn’t act like money. It acts like a commodity – going up during periods of inflation and down during periods of deflation. If the credit bubble deflates, gold will go down, not up, Porter predicts. More on this tomorrow.

*** The gap between inflation-adjusted bonds, or TIPS, and regular 10-year T-bonds, has fallen from 1.90% in mid-2000 to 1.37% by the end of the year. Investors are not concerned by inflation. They don’t see it coming and see no reason to give up any interest yield to protect themselves from it.

*** While investors’ attention focuses on the Fed’s next rate hike and the decline in asset prices, Greenspan and company are busily inflating. The money supply, as measured by M3, rose $56 billion last week, to more than $7 trillion. It has gone up $105 billion in the last 4 weeks and has risen $1.64 trillion – or about 30% – in the last 3 years.

*** What happens to this `money’? If it finds its way into asset prices, a bull market will soon return to Wall Street…and all will be well. Gold can stay asleep for another year or two. But will it? A prediction, below….

*** "In the time it took America to work out who had won the election on November 7," opines the Financial Times, "the seemingly unshakeable optimism surrounding the economy had been replaced by a sudden onset of fear and gloom. Consumer confidence plunged, stock prices swooned and the manufacturing sector shed jobs at its fastest rate in 10 years." A year ago, America was on top of the world. "American Triumphalism" was a theme of hundreds of newspaper editorials. How times have changed.

*** Sales of existing homes increased 4.4% in November – thanks to lower mortgage rates.

*** Montgomery Ward is closing down 250 stores, proving that you can’t make any money selling everything to everybody. When I was growing up, `Monkey Ward’ as we called it, was where we did most of our shopping.

*** New Year’s Eve and New Year’s Day passed without dramatic incident here at Ouzilly. Madame de Thierry, about whom I have written to you in the past, came over for tea with her son and his family. The kids played soccer in the living room and kicked the ball into Elizabeth’s Venetian- glass chandelier…but it did no damage. Later, we all went over to Pierre’s for an aperitif – celebrating the baptism of his granddaughter. The child’s mother nursed the baby on the side of the room as friends, aunts, uncles, cousins, grandparents…and some relatives whom no one seemed to recognize…drank champagne, ignoring her. Later, we had a quiet family dinner – we pulled our `poppers’, put on our funny hats, welcomed the New Year, and went to bed.

*** Edouard, a friend visiting from Paris, and my son, Will, went out after midnight and built a fire near the pond. The wind came up. I was afraid they might set the woods on fire. But when I got up the next morning, the woods were still there.

*** I’m a little concerned for Mr. Deshais, however. I haven’t seen him in a couple of days. He should be here. I hope nothing has happened to him…or else I will have to take care of the geese, turkeys, chickens, ducks and rabbits myself.

More to come….

Your correspondent,

Bill Bonner

Ouzilly, FRANCE January 2, 2001