The Perfect Financial Storm - Part 4: The Gathering Storm

Indian summer. Clear skies. Light winds. It's a good time to get outside and enjoy the weather. Like the weather forecast these days, the economic forecast calls for nothing but good times. The economic expansion that began in March of 1991 continues to barrel along. Today's economists believe Fed policies will slow the economy down to a more sustainable growth rate. The soft landing that Wall Street is counting on will allow the economy and the stock market to continue its process of wealth creation.

But offshore, beyond the horizon, far from land, an economic storm is brewing unnoticed on any radar screen. A gathering storm is approaching. At the moment there are no visible signs. The weather is clear, the winds are light, and our economic weathermen see no signs of apparent danger.

Consumer and business confidence is still running high and the country as a whole is optimistic about its future. Each quarter government statisticians report miraculous growth rates accompanied by low inflation and higher productivity. Federal Reserve Bank presidents expect the current economic expansion to continue through next year. The Fed is forecasting economic growth rates that will range between 3¼ and 3¾ percent for 2001.[1]

The only cloud on the horizon is the possibility of an increase in the inflation rates. Even so, government officials who believe that any increase will be offset by productivity improvements, shrug it off. The only threat in the minds of Fed officials is a slight increase in the inflation rate due to higher energy prices. Further, they expect this brief aberration to disappear next year when they anticipate that oil prices will fall to more reasonable levels.

Chairman Greenspan, in his latest speeches to various audiences, continues to hail American productivity and innovation. Labor conditions remain tight, but strong gains in worker productivity have kept increases in labor costs at a minimal level. The message from the Fed is that we are the beneficiaries of a new era in economic growth. This new era is being driven by productivity-enhancing technology. The result is a perception that the US economy is racing ahead of other countries, exploiting this new technology, and thereby, reaping the rewards in higher economic growth, greater productivity, and fabulous stock market gains. Never before has the world witnessed wealth creation at such a gigantic scale as in the last four to five years.

What's Wrong With This Picture? – Plenty!

Bubblenomics

Much of what is heralded as America's economic "New Era" is an illusion. It stems from statistical wizardry by government number crunchers and corporate accountants. Statements about the US economic miracle of the 1990's omit several embarrassing details: the expansion of the nation's money supply, the explosion of consumer and corporate credit, gigantic trade deficits, and our dependence on massive amounts of foreign money. John Riley of Cornerstone Investment Services has created a very interesting graph which shows the extent of our current bubbles.

The Bubble Flow Chart

Source: John Riley, Cornerstone Investment Services

As to the stellar economic growth rates with no inflation, it depends on what is being measured. US inflation rates are among the highest in the industrial world. Monstrous trade deficits, an explosion in private debt, and a leveraged financial boom are symptoms of this inflation that often go ignored by the financial press. These elements are all part of the components that make up America's financial bubble.

Our Two-Tiered Economy

To understand our so-called economic miracle requires a clear comprehension of what many refer to as America's two-tiered economy: one old and one new. Our new economy consists of technology-driven companies that are generating the bulk of their wealth through capital gains in the stock market versus the real economy. The actual wealth that has been created through production and the capital stock of new high-tech equipment has been minimal. The wealth that is being generated in the new paradigm economy lies primarily in stock market gains as opposed to the production and use of equipment.

Meanwhile, cost cutting, corporate restructuring, downsizing, mergers and acquisitions and stagnant profit growth characterize the old economy. As the table below indicates, corporate profits by industry have actually declined over the last two years. Stagnating profits stand in sharp contrast to rising stock prices, which are the direct result of financial engineering. Stock buybacks through the leveraging of the corporate balance sheet, mergers, and payment of options in lieu of higher salaries have all served to mask the sub-par profits of the current economic recovery.

United States: Corporate Profits by Industry
(Billions of Dollars)

The contributions of the new economy have had little impact in terms of generating a multiplier effect on economic growth. The insignificance of this endowment, combined with the restructuring of the old industrial economy, has resulted in minimal contributions to the nation's accumulation of capital stock. Capital stock consists of new plant, equipment, and machinery, which are the wealth creation mechanisms of enduring prosperity. The major characteristic of the old industrial technology was a high level of capital accumulation, made up of investment spending and savings. This capital accumulation became a key source of wealth and immense prosperity for the nation. An explosion of credit and consumer spending has replaced them. The portion of GDP that made up consumer spending has gone from a long-term average of 66% to a current rate of 94%.[2]

The New Economic Model

The old model has been replaced by a new economic model, which focuses instead on shareholder value reflected in the stock market. Today's investors have little knowledge of how profits are generated—nor do they care. It doesn't matter whether higher stock prices are the result of new investment spending, cost cutting, stock buybacks, or financial engineering. Wall Street and Main Street focus on little else but the price of the stock, period.

To perpetuate this new era thinking required not only creative accounting on the part of management and their counterparts on Wall Street, it also required a change in the way we measure wealth within the economy. To that end, our government was a ready accomplice.

The Elements of Statistical Wizardry and Manipulation

The economic miracle which Wall Street and Washington herald to investors around the globe is a by-product of statistical wizardry. It has do with the way government statisticians measure the new economy. The most important figure is GDP. This is the figure that has captured the imagination of investors and headlines around the globe. Economic growth rates over the last few years have been short of being miraculous. They have averaged above 4% for the last few years and above 5 and 8% during the last half of 1999. During this year they are running over 5% despite repeated interest rate increases by the Fed.

Gross Domestic Product
(Percentage Change in Real US GDP)

Element #1 GDP Deflator Dynamics

This high level of economic growth is a product of unique statistical factors, which diverge from norms practiced by other nations. The first element is the GDP Deflator, which has been conveniently lower, adding to GDP growth. To get a true picture of economic growth, which is the sum of the nation's economic activities, it is necessary to back out the effects of inflation. By backing out the impact of inflation, you arrive at the true level of economic activity. The lower the deflator, the less that is subtracted from the actual economic numbers. The GDP deflator has been averaging in the low 2% range for much of this decade. As the table below indicates, everything from housing prices, food, utilities, medical costs, gasoline, and retail goods have been rising at much higher rates. By understating inflation, government statisticians have been overstating GDP growth.

Many have questioned our inflation rates and how they are measured. Recently, the Bureau of Labor Statistics has admitted that consumer inflation has been slightly higher than officially reported. The Bureau attributes the lower inflation numbers to a "calculating glitch" and will be revising the CPI upward. The revision could boost consumer inflation rates by as much as 0.3% for the past 12 months.[3]

For the 12-month period ending last month, consumer prices rose 3.4%, while the core CPI, which excludes energy and food items, rose 2.5%. Because of these lower reported inflation rates, the government has benefited by paying lower cost-of-living adjustments on social security and government pensions. Our government has also been the beneficiary of lower interest costs, especially on it's inflation-adjusted bonds known as TIPS. The soon to be announced higher inflation news is unlikely to be welcomed by the Fed or the financial markets. Higher inflation will mean higher interest rates and trouble for the stock market.

Element #2 Hypothetical Hocus-Pocus

The next GDP manipulation takes place through a measure called the Hedonic Price Index. This is a statistical maneuver employed by government statisticians to measure computer output and investment. It is meant to capture the increase of computer power in terms of speed and memory. The government takes the actual increase in spending on computer investment and applies a statistical wand which changes the actual number into a higher number reflecting the hypothetical benefits of soaring computer power.

Like corporations, which keep two sets of books, one for financial reporting and another set of books for taxes, the government also keeps two different sets of books. One set is the actual dollars spent on the output of goods and services and the other set is called chained dollars, which is derived after various statistical manipulations have been applied to the actual numbers. As this table shows, actual computer spending in actual dollars went from .3 billion during the fourth quarter of 1998 to 4.2 billion in the second quarter of this year. This represented an increase of billion in actual dollars being spent during the last six quarters.[4]

Investment in Computers & Peripheral Equipment
(Billions of Dollars)

However, after applying the hedonic deflator, that actual number is changed into 7 billion in chained dollars for the same six quarters. This technique magnifies the actual contribution of computer investment to GDP growth. This manipulated rise in GDP growth doesn't reflect actual increases to GDP growth. Instead, it reflects the increase in computer power that businesses are getting for their money. As the power of computers increases, so does the impact of the hedonic deflator. Effectually, this creates a statistical mirage, which magnifies modest sums of money spent in actual dollars into giant sums in chain-weighted dollars.

Element #3 Software Shenanigans

Another element of statistical manipulation greatly magnifies the economic growth contribution of the technology sector. This new contrivance happened last year when government statisticians changed accounting procedures for booking computer software. Formerly, spending on software was considered to be a business expense. This acted to reduce corporate profits since expenses are subtracted from revenues. Business expense normally doesn't enter into GDP accounts. By changing expenditures for software from an expense to an investment, it is now added to GDP. This accomplishes two objectives. It increases GDP growth and it serves to increase corporate profits and government tax revenues since software can now be capitalized instead of expensed, thereby reducing profits.

Investment in Software
(Billions of Chained 1996 Dollars)

Software spending has been running above 0 billion per year. The combination of inflating the dollars spent on computers, and including software spending as a capital asset, has artificially inflated GDP by a sum of over 0 billion. These statistical manipulations accounted for 32% of the reported GDP growth. [5]

Over-Stating US Productivity

Accounting gimmicks also overstate US productivity figures. Productivity is simply the increase in total output as measured by GDP, divided by the increase in total hours of labor used to create that output. Recently, those numbers have been remarkable. Tinkering with the GDP Deflator, and adding the Hedonic Deflator have artificially enhanced the actual GDP numbers. The larger the GDP number in relation to the total hours of labor, the higher the rate of productivity.

Exposing the Statistical Mirage

The results of these measures have produced an awe-inspiring statistical mirage that has camouflaged the inherent weaknesses and vulnerability of the US economy. This unique way in which the US measures and accounts for its GDP and productivity has captured the attention of international organizations such as the OECD. Other well-known writers from the Austrian school like Dr. Kurt Richebächer, and financial writer James Grant, a columnist for the Financial Times, have called attention to these statistical fallacies.

Writers in the mainstream press have attacked these truth-tellers. The mainstream press argues that increases in DRAM, hard drive capacity, and such things as DVDs, although not costing more today, add additional value to a computer that is not captured in its price. Nobody would argue that today's computer is faster and more powerful than the computers built back in 1996. However, computers have become a commodity that is subject to intense price competition. The price of computers has fallen as production has ramped up and competition has decreased their price as with any other commodity.

Hypothetical Results Creating False Weather Patterns

What matters most is actual dollars spent – not hypothetical dollars produced. This statistical manipulation allows the US to overstate economic growth and productivity, which gives way to the mythical concept of the "New Era" so widely promulgated on Wall Street and in Washington. These manipulations make our economy appear to be more robust than it actually is. It also makes comparisons to other economies difficult. The rest of the world uses apples accounting while we use oranges. It also serves to misallocate capital. Money gravitates to areas where it is most productive. The higher US GDP growth and productivity figures along with above normal returns in our stock market have acted as a magnet for capital from around the globe. It has enabled the US to finance its burgeoning trade deficits.

The Storm Fronts Are Gathering

The appearance of above-average economic growth, high productivity, low inflation and booming stock markets has created an illusion of false prosperity. It has also masked the inherent weakness of this economic recovery. The robust economic numbers have drawn our attention away from three storm fronts that are gathering in force and will soon start to buffet our economy.

Storm Front #1 Debt and Deficit

The first storm front is the growing level of consumer and corporate debt. Each month the Commerce Department reports personal income and spending. Income levels have been rising steadily but not fast enough to keep pace with spending. Personal income, which includes wages, interest, and government benefits rose 0.4% last month while personal consumption rose 0.6%.[6]

As a result of consumers spending more than they are earning, our nation's savings rate has plummeted to -0.4%, the lowest reading since economists started to track these figures back in 1959. As the graph from the Federal Reserve indicates, consumers have been outspending income since 1997. Because consumers are spending more than they are earning, they are loading up their balance sheets with more debt. Outside the federal government sector, debt expanded at an annual rate of roughly 9½% during the first half of this year, propelled by consumer and business borrowing. Household debt not secured by real estate, which includes credit cards, auto loans and other installment debt is growing at an annual rate of 10%.

Beginning Signs of Strain on US Banks

The combination of rapid debt growth and rising interest rates has pushed the household debt-service burden to levels not reached since the late 1980's. This is stretching the ability of the consumers to meet their mortgage and installment debt payments. Already we are seeing signs of this strain as major banks start to report credit woes and loan problems. For the last two quarters, banks have warned of lower earnings due to an increase in problem loans. AmSouth Bancorp said earnings for the next six quarters would be below expectations. The bank will take a pre-tax charge of 0 million to boost its loan loss reserves.[7]

Other banks have been following suit. First Union, KeyCorp, Bank One, Wachovia Corp. are all boosting their reserves to account for non-performing loans. Credit strains are showing up elsewhere in the economy with Helig & Meyers filing for bankruptcy protection due to defaults on installment payments by its customers. These are good times with low unemployment, rising incomes and a robust economy! A recession or slowdown in the economy will only exacerbate the financial vulnerability of the consumer and ultimately, their banks.

An understanding of this predicament is one reason that a severe recession, rather than a soft landing, is the most likely scenario for the US economy. It stands to reason that consumers cannot keep adding debt indefinitely. Eventually, their incomes will be unable to support additional debt. Banks may refuse credit or begin to call in loans. With savings rates down to zero, any cutback in debt accumulation would slow consumer spending which now accounts for over two-thirds of GDP.

Possible Run to the Trenches

Another possibility is a severe retrenchment by consumers due to a stock market downturn. Just as rising stock prices added fuel to consumer spending due to the wealth effect, a stock market crash would cause just the opposite—a contraction in spending. Economists are ignoring the fact that it is taking more credit creation and dis-saving by consumers to maintain economic growth. If consumers retrench due to a stock market crash, a major force powering our economy would disappear. The point of all of this is to realize that a slowdown in spending or debt accumulation by consumers results in a downturn in economic growth. That will mean a drop in profits and a downturn in stock prices.

Trade Deficit Woes

Another related problem that ties into America's consumer debt and spending binge is our trade deficit. Our trade deficit is now at record levels. By any measure it is a huge problem. The trade deficit is the result of the difference between what we buy from foreigners and what they buy from us. It is growing exponentially as the graph below indicates. The result is that our nation is transferring hundreds of billions of dollars into the hands of nations that export to the US This is giving them enormous potential power to affect the American economy and its securities markets.

During the last five years, foreigners have chosen to recycle those exported US dollars back into our financial markets and economy. This has resulted in a major increase in the ownership of our securities markets. As of the end of last year foreign ownership of US assets had risen to an estimated .97 trillion. Our net credit balance is actually close to 1.6 trillion. The result is that foreign ownership of our factories is increasing as the percentage of American ownership declines. From Chrysler, Best Foods and DLJ, to Amoco and Atlantic Richfield, foreign corporations are acquiring more of America's companies.

In the last century, America ran chronic capital deficits with foreign countries. Those capital inflows were used to build our country's infrastructure of canals, bridges, railroads and industrial plants. That served to enrich our country by building up our capital stock. Today's capital inflows are being used to finance an unprecedented consumer borrowing and spending binge. We are trading our capital assets for consumption assets, and in the process, eating up our seed corn.

Foreign Capital Dependence

Those chronic deficits have made us heavily dependent on foreign capital. Foreigners have had an insatiable appetite for US financial assets. Those inflows have been supported by high returns on assets represented by our stock market and high real interest rates. However, should those rates of return diminish through a decline in stock prices or an increase in inflation, those dollars could quickly flee the country—as happened to Asia in 1997. If foreigners lose confidence in the US or feel their capital is at risk, those inflows could stop or even worse be withdrawn. This situation is untenable in the long run.

Storm Front #2 Oil

Dependence on Foreign Oil

Related to our burgeoning trade deficit is a second storm that could buffet our economy. It is our growing dependence on foreign oil. The trade imbalance that our country is running up each month is increasingly being made up of imported oil. The result has been a three-fold increase in the price of oil from its trough of a barrel reached back in 1998. Everything that is energy-related has gone through a manifold increase. Gasoline, heating oil, natural gas, and fertilizer, and chemical additives have all risen substantially in price.

Oil Storage at Low Levels

The situation in natural gas is even worse. The retreat of the La Niña weather pattern, which produced warm winters, the strong US economy, and a major increase in the number of new natural gas-fueled generating, plants, have increased demand for natural gas. US gas storage numbers are at disastrously low levels. It is possible if weather conditions are severe enough this winter, that we could face the possibility of rationing.

This is a persistent problem that will not go away. The US ceased to be energy-independent in 1970. Our once prolific reserves have diminished. Domestic production has been in decline for three decades and there is no immediate quick fix. Refinery production capacity has been stagnant over the last two decades. Because of the growth of radical environmentalism, the US hasn't built any major power plants (fuel and/or nuclear) or refineries in more than a decade.

The fundamental driver of the 20^th Century's economic prosperity has been an abundant supply of cheap oil. It came primarily from the United States during the first half of this century. But US production peaked in 1970. Since then, the focus of supply has shifted to the Middle East and along with it, growing political power. In the next decade, five Middle Eastern countries will produce 60% of the world's oil.

Estimated World Oil Distributed
(Billions of Barrels)

The significance of all of this is that energy resources, which are vital to American industry and our economy, are now chiefly in foreign hands. Colin J. Campbell of Petroconsultants believes that conventional oil production will peak by 2005, and all oil production in 2010. This peak in production doesn't mean we are running out of oil. It means we are running out of cheap oil. Once this perception takes hold, it will have a radical impact on business decisions and investment strategies. It will also alter the balance of power in the world.

A Sea of Silence & Disbelief

The most remarkable aspect of all of this is the degree of complacency in Washington, Wall Street, and on Main Street. All appear to be either doubters or unimpressed by the dimensions of what is visible. A sea of silence becalms us. There are no public outcries. The media is silent on the coming crisis and acts as if it doesn't exist. In fact, as this crisis unfolds, we see an even greater degree of complacency. The public has been mollified by the belief that the government has things well in hand. In fact, this current administration has no plan at all.

Many on Wall Street and in Washington believe this is only a temporary problem. It is widely believed that a slowdown in our economy and increased production from OPEC will eventually bring down prices. However, production in the lower 48 states has dropped in half. As of 1994 the US is down to only 35% of its original oil reserves.[8] In addition to the depletion of our reserves, the oil found per well drilled has dropped significantly. Over three quarters of US wells are stripper wells, which produce less than 10 barrels of oil a day.

The Ripple Effect

The result of this neglect is spiraling energy costs that are hurting consumers and companies alike. In San Diego, as a result of deregulation, utility bills have risen, as much as 300%. Gasoline prices in many parts of the state are over a gallon. Our state has experienced brownouts this summer and has been at Stage Three and Stage Four alerts since July.

For consumers, this is adding additional costs to an already stretched budget. For corporations, it will mean added costs for manufacturing. Higher energy costs will impact the various sectors of the economy that are energy dependent. Cement plants, heavy chemicals, steel, commercial construction, and automotive and aircraft manufacturers will all be affected.

Storm Front #3 Diminishing Corporate Profits

The third storm front that is gathering momentum is the coming slowdown in corporate profits. The markets experienced turbulence for much of this year. The overvaluation of the stock market has been justified by Wall Street expectations for higher profits. However, more and more companies are reporting revenue and earnings shortfalls. Companies from the old and new economy have been following each other in a parade of disappointments.

The Sponge Effect

Much of the reason for profit disappointments comes from rising labor, energy and material costs. In today's competitive global economy, major corporations have lost much of their pricing power so they must absorb costs in order to maintain market share. This sponge effect is squeezing profit margins. Also adding to profit woes has been the dollar's appreciation against the Euro, which reduces overseas profits in foreign currencies when they are translated into dollars back home.

Corporate profits peaked back in 1997. Since that time, companies have managed to please Wall Street and investors through creative earnings manipulation. Companies are using a plethora of accounting gimmicks to avoid disappointments. They range from booking capital gains as operating profits, as in the case with Intel and Microsoft, to stock buybacks. However, the time for gimmicks may be running out. Companies ranging from Coca-Cola, Wal-Mart, Bausch & Lomb, Home Depot, to Gillette have warned that recent strong sales and earnings will probably not continue in the second half of 2000.

Old & New Economy Warnings on the Horizon

It isn't just old economy companies that are warning of disappointments. Technology companies like Next Level Communications, Intel, and Apple Computer have all warned of a slowdown in sales and earnings. Others like the recent announcements of UAL and Xerox have actually warned of losses. During the pre-announcement phase, ahead of third quarter earnings, the warnings rose substantially. Analysts are already reducing earnings estimates for the third quarter to around 16% from the 18% consensus back in July. The Street is also trimming back its estimates for the final quarter of the year. The real problem could surface when companies disclose their third-quarter earnings and then begin to talk about the fourth quarter. There is a good probability that this year's final quarter won't be as strong as originally estimated.

Fair-Weather Friends Retreat

The problem with earnings disappointments is that this market has been priced for perfection. Any company that manages to disappoint on expectations is immediately shot on the spot. The quickest way to evaporate shareholder wealth is to reveal that there are revenue or earnings shortfalls ahead. The chart on Apple Computer is a good example of what happens to shareholders of high priced stocks when there is bad news.

Compensation Crunch

The Nasdaq, which is down 10% as of this writing, may present another problem for technology companies. Stock options represent a major source of compensation for technology companies. At the end of the second quarter, option gains for the S&P 500 firms jumped to 0 billion from 6 billion in 1999. That amounted to close to 15% of compensation for those companies. This could become a major source of disappointing earnings in the future. If the markets continue to fall, the value of options and employee net worth declines. This could force companies to increase compensation as options lose their luster.[9]

Reality Comes Home to Roost

Our market has been held up by the belief of the permanency of corporate earnings. When earnings begin to deteriorate, as they must as the economy slows down and costs rise, then the high market multiples characteristic of this boom will come home to roost. For the majority of this century, stocks have sold at 12-15 times earnings. Growth stocks, because of their superior growth rates, have commanded multiples between 20-30 times earnings. Today the S&P 500 trades at 28 times this year's earnings; while the Nasdaq trades at a PE multiple of 128. Clearly this is a market priced not for perfection but eternity.

All of these problems which range from an over-leveraged consumer, rising energy costs, mounting trade deficits to rising interest rates will eventually slow down the economy. When that happens, it is likely to turn into a recession—a topic no one is talking about. The US economy has a lot of imbalances that need to be addressed: the balance-of-payments deficit, the trade deficit, the savings rate and our energy dependency are just a few. The problem this time around is that we have no stabilizers to cushion the fall. Our savings rate is negative and consumer balance sheets are filled with debt.

What Lies Ahead

The Soft Landing Scenario

There are three possible scenarios ahead for the economy and the financial markets. The first scenario, and the most benign, is the soft landing. This is what Wall Street and Washington are counting on. It is the one trumpeted by the financial media. Under this scenario, the economy slows down to a manageable growth rate, stock prices moderate, inflation remains low, productivity continues to rise and every one lives happily ever after.

This Cinderella story may exist only in academic theory or in the delusional trading pits of Wall Street. Stock speculators, who would have the opportunity to benefit from another run up in stock prices, would welcome any slowdown. Unfortunately, this would fuel another consumer spending spree, which would trigger another response from the Fed. The soft landing theory also presupposes no external shocks to the system such as an energy crisis or another derivative crisis like the one we had with Long Term Capital Management.

The Touch-and-Go Landing Scenario

The second theory is the touch-and-go landing scenario. The economy under this plot alternates between quarterly slowdowns and spending spurts. Fed rate hikes trigger the slowdowns while stock market rises spur spending. In my opinion, this is the least likely scenario since enough Fed rate hikes would eventually snuff out any chance of recovery.

The Crash Landing Scenario

The final option is the crash landing scenario. The combination of Fed rate hikes, consumer and corporate debt burdens, exploding energy prices and excessive speculation in the financial markets could bring on a recession. This option is looking more likely because of the numerous imbalances within the economy. The odds in this century are against a repeat of the 1994 Fed-engineered soft landing. Rising debt burdens, widening trade deficits and expanding stock multiples can't go on forever.

Beyond the Horizon

Today, we are already seeing visible signs of a slowdown on the radar screen. Housing starts are starting to soften, retail sales are slowing, durable goods sales are falling, the major indexes are moving into negative territory, and inventories are starting to build. These represent classical signs of a cyclical business peak. The key signs ahead will be to watch consumer spending and its concomitant effect on inventories.

Looking forward, what happens to corporate profits, the stock market, and the wealth effect on consumer balance sheets, will determine the severity of the outcome. Just as weather forecasts are unpredictable, so too are forecasts on the economy and the stock market. An informed investor must begin to comprehend these gathering storms beyond the horizon. It remains to be seen whether these storms will turn into a singular momentary squall, buffet the economy one after another, or collide to become "The Perfect Financial Storm".

The next installment in this storm series will explore various factors that could cause these storm fronts to collide. Will it be a rogue wave or a rogue trader? Will we experience inflation or deflation? Only time will tell. Investor, beware. Bear-O-Metric Pressure is dropping rapidly.

References:

[1] Reserve Bulletin, August 2000, Monetary Report to Congress, p. 541
[2] Richebächer Letter, August 2000, p.4
[3] "Inflation Higher Than Reported", Washington Post, September 27, 2000
[4] Richebächer Letter, September 2000, p. 5
[5] Richebächer Letter, September 2000, p. 5
[6] "Spending Rise Tops Income", CNNfn, September 29, 2000
[7] "Credit Quality Still a Concern for Banks", CNBC.com, September 25, 2000
[8] Youngquist, Walter, GeoDestinies, Nat'l Book Co., 1997
[9] US Quarterly Economic Outlook, Third Quarter 2000, A. Gary Shilling & Co., 8/23/2000

Book Reading Recommendations:

• The Theory of Money and Credit by Ludwig von Mises
• The Way the World Works by Jude Wanniski
• GeoDestinies by Walter Youngquist
• The Color of Oil by Michael J Economidesa and Ronald Oligney
• Full Faith & Credit by James Cook