Every once in a while I like to go out on a limb with a wild prediction. And my prediction today is that the Dow will experience a major league crash in 2001. If you thought Monday was scary, in the words of Al Jolson, “You ain’t seen nothin’ yet.”
Let me take you back to January 2000. The pundits were saying that higher interest rates would not impact technology stocks because most technology companies were debt free and didn’t have to borrow money. I tried to point out at that time the concept of a supply chain. Basically, my argument was that it didn’t matter if Acme Technology were debt free if Acme Technology’s customers (e.g., Wiley Coyote) needed to borrow money in order to buy Acme’s products, and couldn’t afford to borrow at higher interest rates.
I was correct, of course. Technology was impacted by higher interest rates, although to a much greater extent than I or anyone else imagined.
Now we have pundits / fools saying that this will be a technology recession only — that the bear market will somehow be isolated in the Nasdaq.
What utter nonsense. What blithering idiots.
As I was telling Don Luskin of MetaMarkets last week, people are missing something very big here.
First of all, when companies cut back on capital expenditures, they don’t just stop spending money on technology. They stop spending on all sorts of capital equipment — the kind made by your favorite Dow companies.
Secondly, technology is the economy, folks. When I was a kid growing up, General Motors was the economy. Today, its the technology companies that determine the overall health of the economy.
What’s my point? What do you think happens when technology companies layoff hundreds of thousands of workers? And what about the workers who haven’t been laid off but are now in desperate fear of losing their jobs? I’ll tell you what happens: these people stop spending money on the products made by your favorite Dow companies. When I was employed at Digital Equipment Corporation while it was in the process of (mis)managing itself out of business, I was so fearful of losing my job that I didn’t even take my vacation days — I rolled them over to the following year (a practice Digital allowed until everybody started doing it for the same reason I did) to give me several extra weeks of termination pay. And I put a cork in the spending faucet.
So the notion that consumer cyclicals are immune from the bear market is absolutely ridiculous. When people stop spending money on consumer cyclicals, profits will go down, and stock prices will follow.
That’s why the carnage won’t be over until we have a monster Dow crash. My prediction for 2001: A Dow 7500.
Now here’s the interesting thing: where will the money go when people bail out of the Dow? Well some of it may find its way into technology, which having already undergone a 70% “correction”, will be perceived as a safer place to invest than consumer cyclicals. So a Dow crash should, at the very least, stabilize the Nasdaq.
But don’t look for a broad recovery until we have had a broad crash. It’s a simple as that, folks. It’s all interconnected. Always has been. Always will be.
Now I know some of you would like to think that Alan Greenspan can wave his magic wand and stop the bleeding by lowering interest rates. But Alan Greenspan is too late. This snowball has too much momentum, baby. The only way to get it back to the top of the hill is to wait until it gets to the bottom, and then slowly push it back up. And that will take a while.
Ironically, the faster the Dow crashes — the faster it gets to 7500, the sooner the recovery. And right now, I think my risk is greater in the Dow than in the Nasdaq. But to quote Dennis Miller, “That’s just my opinion. I could be wrong.”
