Memo To: Kenneth Fisher, Forbes columnist
From: Jude Wanniski
Re: Your Rosy Scenario
We've never met, Mr. Fisher (I don't think), but I see your column from time to time in Forbes and note that you are a money manager based in Woodside, California. The October 18 issue just came in and I see you are pooh-poohing Y2K, predicting it will be accompanied by a boom on Wall Street, not the selloff that Ed Yardeni has been forecasting for almost two years. As you put it: "Y2K is the most widely hyped ‘disaster' in modern history. It is well documented: The only folks who aren't familiar with it are in the upper Amazon basin, rapidly fleeing the rest of humanity. I need not even define Y2K for you to know exactly what I'm referencing."
You may be right and I hope you are, but I must take issue with your basic argument that Adolf Hitler was a bigger risk in 1941 than Y2K is in 1999, yet the S&P 500 rose 20% in 1942, "long before anyone could possibly know with any certainty that we would win the war," and rose again 26% in 1943, 20% more in 1944, and 36% more in 1945. I could not find the series to which you refer, Mr. Fisher. The only S&P numbers I can find for the period show a weaker market. I do find on Bloomberg that the Dow Jones Industrial Average was at 148.43 in April 1940 and went as low as 95.35 in April 1942. That's quite a decline, I would say. The DJIA did not get back to 148 until June 1944, by which time war was well enough in hand that post-war planning was being scheduled by the allies in a New Hampshire hotel in Bretton Woods.
What I really question, though, is your description of the efficiency of the market, at least in this situation: "[Markets] decline before a war or recession or something else ugly starts. Usually, they move with a long lead. They rise long before events improve. Hence the age-old adage, ‘The Market knows.' The market is also a ‘discounter' of all known information. That means that whatever we know, fret, read and cluck about is well priced into markets."
The problem here is that Y2K is an "unknown," which the market realistically cannot discount. The information the market has been given, on which it can render a judgement, has been fairly optimistic of late. But when we are dealing with the unknown in this once-in-a-millennium problem the potential risks are at least as great -- and I think much greater -- than the risks we faced in 1941 as war began with the Axis Powers. I tend to doubt that the "market" gave much credibility to the possibility we might lose the war, but questioned the length of the war, its cost, and post-war tax and monetary policies. By the way, 148 on the Dow was no big deal in 1942, as it had been higher than 220 in 1930, after the Crash of 1929. In addition, the dollar had been devalued by roughly 60% in 1934, so you can discount "148" on the Dow by that amount to get to a real number.
If we can't know how bad Y2K will be, or how insignificant, the market cannot realistically put real numbers on a future income stream to the nation's capital stock discounted to present value. My hunch is that there will be greater problems than conventional wisdom suggests because there may be unknowns that will cause systemic problems. I especially worry that computers may be unable to handle the volume of financial traffic in the world's non-monetary system of floating exchange rates...and that central banks will tend to compound problems with human error. Now I hope you are right, but the arguments you present do not sustain your conclusion that "there is more likelihood of a big pre-year-end up move than any other possibility." Please always remember that if you take the dollar price of gold into consideration, the numbers on the DJIA or the NASDAQ or the S&P500 all have to be adjusted. In other words, we cannot credit you with your bullish prediction if the DJIA adds a thousand points in December if the price of gold climbs by a greater percentage amount.