PREDICTIONS FOR 2001 by Bill Bonner, The Daily Reckoning

01/02/2001

Actions Have Consequences

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.

Year 2000 Predictions

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.

2001 Predictions

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.

*** 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. ----------------------------------------------------------------------------------------

For more of the wisdom of Bill Bonner visit http://www.dailyreckoning.com






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