Items for the End of the Millenium Jude Wanniski November 11, 1999

CLINTON AND Y2K: The President announced Wednesday that the computer bug is well in hand. The government has done its job, he said, and there is nothing much to worry about. Some schools might have to close down for awhile -- good news, kiddies. And there are some 911 emergency numbers that may not be working -- but they rarely work anyway. I'm not sure the President believes all that, but certainly the general belief is that there only will be occasional glitches, given the fact that official assurances are the order of the day. There is much more concern at the Senate Y2K Select Committee, which continues to get reports of danger signals that are not making the newspapers. One comment from a committee staffer is that there has been no full-time reporter of the major newspapers assigned to the committee, which is why salient information in open hearings does not make the news. Editors are assuming there is no big problem, because the people responsible in government are minimizing the dangers of systemic failure -- the President, the Treasury Secretary, the Fed Chairman. The editors rotate reporters who themselves are conditioned to downplay all they hear that is not in line with the "we're okay" view. One Y2K committee staffer worries about cash liquidity at the countdown. There is $50 billion in cash at the Fed regional banks, but commercial banks have to pay above-market rates to draw cash down in case there is a lack of confidence. Thus far few are willing to absorb that cost. The Y2K staff has been urging the Fed to permit the banks to store the cash on pallets, at no cost, and if it is not needed, the Fed will cart the cash away. The Fed bureaucracy so far rejects the idea, refusing to pass up the income.

CAMDESSUS QUITS: IMF director Michel Camdessus has resigned after 13 years of mismanagement -- two years before his term expires. He may not wish to be around at Y2K if there are global financial problems. More likely, the international bankers he serves are wary of having the wrong man elected President in 2000, someone who will insist on a replacement from the developing nations instead of another stooge for the bankers and multinationals who use the IMF to milk the taxpayers for bank bailouts. Unless there is a campaign to bring someone like Mexico's Pedro Aspe or Argentina's Domingo Cavallo to replace Camdessus, the choice almost certainly will be made in the small circle around Citicorp Group. The point man, of course, will be its new co-director, Bob Rubin, who will give the green light to the big guys in Europe after consulting with his old friends at Goldman, Sachs. He then would pass the word to Larry Summers and Alan Greenspan on who the new man will be handling the slush fund.

A TRUMP TAX? Donald Trump knows how to make news, but we wonder if he knows how to make money. He was all over the New York tabloids yesterday with his proposal to TAX the RICH in order to pay down the national debt. If he is elected President, if he runs for President, he would ask Congress to pass a 14.25% wealth tax on all individual assets in excess of $10 million. This would pay down the national debt in one fell swoop! Because he insists his net worth is $5 billion, he would pay up $725 million, he says. To liquidate his assets in order to get $725 million, he would have to pay the additional 20% capital gains tax. Actually, the stock market would crash if the plan were likely to become law and there would be no capital gains and far fewer people with wealth above $10 million. The national debt would increase. Alas, if marked to market today, poor Donald may actually be broke. Forbes was extremely generous in putting his net worth at $1.4 billion, instead of the $5.5 billion he submitted. Trump stock, traded on the NYSE, is now down to under $4 from its $24 or so earlier in the decade. The buzz is that he had to borrow $28 million from the company to pay personal debts, and the property holdings are so heavily leveraged that even a Y2K sneeze in the economy would blow him away. All the publicity, though, has apparently improved cash flow in the Trump casinos, which is really what his "presidential campaign" is all about.

MARKET AT 20,000? On March 17, when the Dow Jones Industrial Average hit 10,000, we noted that it would be a lot harder to get to 20,000 than it was to get to 10,000. When Robert Mundell got his Nobel Prize last month, I had to chuckle when I saw him predict the DJIA would get to 20,000 in the next five years, recalling that at our client conference last January, he predicted the price of gold would double to 600 by 2005. In other words, as measured by gold, the DJIA would have to go to 20,000 by 2005 in order to represent the same level of capital stock as at 10,000. Then Dow Jones altered the composition of its index last month, adding Microsoft, Intel, Home Depot, and SBC Communications and pitching out Union Carbide, Sears, Chevron, and Goodyear. We were asked if this would make it easier to get to 20,000. Of course, if you take out all the DJIA stocks that are only going to double in 20 years and replace them with stocks that are going to double in five -- with no increase in the price of gold -- then you get to 20,000 in 2005. Except Dow Jones only replaces a company in a declining industry with a mature company in an ascending industry. Microsoft and Intel are already mature and have most of the easy gains behind them. We were quickly reminded of their maturity by Microsoft's setback in the federal anti-trust suit this week. Whenever an enterprise gets to the top of the pyramid, it is practically a law of nature that everyone in the realm will try to pull it down. While it may not make any apparent economic sense to hamstring Microsoft, it does make political sense. Bigger may be better when it comes to economic economies of scale, but a politically bigger Microsoft would systematically buy off the government and both political parties in order to master the universe. No sooner does it join the DJIA than its prospects of another quick double to its market cap come to seem unlikely.

A Y2K "GLITCH" AT POLY: While I was in California last week, the techies came in to certify that Polyconomics' computers were all Y2K compliant. When I got back, I discovered that my "Sidekick" computer address book, a 1994 Borland product with several hundred names and numbers, had disappeared. Holy smokes! It had disappeared. Okay, I had a backup on my laptop at home, so all was not lost. When I switched to the word processor, I discovered that it was dated January 6, 2000. The techie who vetted my computer had set its clock forward and failed to restore the 1999 date. As soon as I did, back came the Sidekick. An easy fix, but a sharp reminder of how much stuff can disappear and may not be fixable at Y2K. (Also, we need to buy new software to replace the Sidekick.) By the way, we are going to have a full-scale review of a worst-case Y2K scenario before the end of November coming at it from several different directions. As noted in our last Y2K service report, I've decided to send the last few issues of our two-year Y2K service out to all of you. This is because the issue will override almost all other considerations as we move toward January and I cannot let you be in the dark, whether you like it or not! If you find the reports valuable during the coming months, you are welcome to postpay for the service.