The InvestMentor

June 22, 1998

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Saw the X-Files movie this weekend. It’s a good movie, but what’s even more compelling than the movie are the number of X-Philes—the theater was packed. I was never a sci-fi fan, but even I can’t help being drawn into twisted plots that weave equal strands of conspiracy, doom, and the "un-explained." There’s something inherently American about paranoia. Given the increasing scarcity of rational things to fear in 20th century American society, we dream up theories whose inevitable result is the chaotic disruption of our comfortable, orderly life—usually with dastardly consequences. I think we get a perverse thrill that comes from it. We’re more Mulder than Scully.

"Mulder, are you suggesting that we somehow create our own quirky focal points of paranoia, as a result of the lack of things that are worth fearing in our day-to-day lives? That we’re not whole as beings without something to worry about, something to keep our eye on?"

"That’s my point exactly, Scully. What if, in a society characterized by a Goldilocks economy, we can’t find anything to worry about? What if we somehow go looking for things to fear, things that will destroy this economy, things that will reach every corner of government, every enterprise, every man, woman, and child?"

That’s not to say we haven’t had real and rational things to fear. We have…but no sooner do the fears of a "flat" world, nuclear holocaust, and population extinction from AIDS begin to wane that we begin to see evidence of witches in Salem, invading African Killer Bees, robots replacing humans, and communists on Capital Hill. Bad press and a few vocal heretics have succeeded in elevating "The Y2K Problem" to its ranks among "The Great Over-worries of All Time."

The Y2K Problem, as it’s come to be known, is the problem that potentially results from how computer systems handle the first day of the new millennium. Most computers store the date digitally and abbreviate the year by the last two digits (i.e. June 22, 1998 is "062298"). Thus, on January 1 of 2000, the computer will not distinguish 2000 from the year 1900, since all it knows is "00." How computers react to this confusion, individually and collectively, is widely debated. The scope and magnitude of the malfunction is at the root of Y2K fears. Some of the more bizarre predictions about the Y2K impact are:

• Given the electronic nature of banking, depositors will make a run on the banks in 1999.
• Utilities shut down causing everything from blackouts to inoperable telecommunication.
• Chaos and instability in currency markets that lead citizens to hoard gold in lieu of currency.
• The cost of making computers Y2K compliant will cause a global recession.
• Air traffic control systems won’t work, causing planes to crash.
• The end of civilization as we know it (sun rising in the west, cats and dogs living together, etc.)

The point of this piece is to acknowledge that while the Y2K Problem is an important, pervasive issue for the world to address, the doomsday versions of January 1, 2000 have resulted in a paranoia whose grand scale will vastly exceed the actual impact of Y2K. From an economic standpoint, this problem will be smaller than expected and thus it’s important to keep that in perspective as a market participant. Let’s close this X-File…the truth is out there…Y2K is overblown. While the Y2K Problem won’t be addressed in all computers, the impact will be minimized because:

Anyone whose business or life is computer-dependent is already worrying about Y2K. It’s certainly true that many large-scale operations cannot afford to crash…but if you run one of these places, you’re already working on the solution. My accounting firm was sending mailers six months ago letting me know they didn’t have reason to believe their system would result in any lost data (i.e. missing money). All major municipal entities have been running simulations to assess the Y2K effect on their systems. The Federal Reserve has announced that all major banks will be Y2K compliant by year end 1998. Even the emerging countries have the engineers, resources, and wherewithal to address Y2K. They read the same things we do.

We’re obsessing Y2K and it’s a year and a half away. A source of my comfort is how many places I can see Y2K causing discomfort. I didn’t realize how little I had to worry about it until a smart friend of mine tried to convince me how much I should be worrying about it. In his 45-minute oral thesis, he cited facts that could have only come from other smart people worrying about Y2K. In my researching the topic, I made several interesting spot observations including:

• I found an average of one-article-per-day about Y2K in the Wall Street Journal.
• Only 2 of 193 leading companies view the EMU as more important than Y2K (oh, please!).
• There are several web sites (year2000.com, gmt-2000.com, Yardeni.com) that are covering the topic (many with creepy, real-timeclocks counting down the seconds to Y2K day.)
• There’s an index (the De Jager Index) of Y2K companies that you can trade options on.
• This month, a committee in Congress was named to deal exclusively with Y2K impact.

Ultimately it’s not the obsessing that’ll solve the Y2K Problem…it’s the opportunity to profit from it. There’s money to be made playing up to this fear, and solving the problem for individuals, companies, and governments. To date, millions of dollars have been spent by companies upgrading to Y2K compliance. The systems consulting business is booming, the data storage business is booming. This isn’t causing a recession, it’s causing full employment.

Most computer systems aren’t time-dependent and resetting the clock will solve their problem. We’ll work around those systems that don’t work. We’ll deal. We are, after all, an industrious lot. Just a month ago, a satellite controlling 80% of pagers, many ATM terminals, and even gas pumps, became inoperable. It was news for a day, but then life went on.

Update on "Market Crash" Prognostication

As of last week, the Market (measured by the S&P 500 and Dow) was down more than 5% from a month earlier when, incidentally, I forewarned readers of an impending "major correction" (Volume 4, Number 10—if you need a copy, don’t be shy). We’ve reversed direction in the last few days prompting the question "is the correction over yet?" Not my Correction. We’ve still got the second half to go and the market will shed more than 10% (from peak-to-trough) before it’s through (for those that track the Dow, I expect it to bounce off its 200-day moving average, which means the Dow should approach 8200 before it’s done). The U.S./Japan joint monetary intervention served to halt sliding stocks, but it is a temporary panacea and ultimately will only drag out the second half of the Correction. The one event that could prove me wrong would be an announced tax cut in Japan (but don’t hold your breath). I expect another air pocket before the end of July. If, however, we haven’t had a major set back by late July, damn the torpedoes, full speed ahead. It’s important to recognize when you’re wrong, and I want my positioning to be done by August. This fall/winter will be a pivotal point for global markets and economies. More on that to come…