Ed Yardeni: Y2K's A Bear (Market, That Is)

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July 30, 1998 (7:44 AM EDT)

By John Borland,

Ed Yardeni is no wild-eyed millennium junkie. As chief economist for New York investment house Deutsche Bank Securities, he's been called one of the best market-watchers in the United States by The Wall Street Journal and other publications. His bullish predictions for 1997 stock trends were among the most accurate of any mainstream economist on Wall Street.

Listen to Ed Yardeni's forecast of a bear market in 2000. runs 6:39 (requires RealAudio player)

His forecasts for the year 2000, and the months leading up to the decade's rollover, are not quite so bullish. A global recession is increasingly likely, he says, accompanied by a U.S. stock crash of up to 30 percent of the market's value.

And that's only the tip of the iceberg. He's spent hours testifying in front of Congress and telling other policy leaders that critical infrastructures and stock markets worldwide are at risk of crashing because so many computers will be unable to read the date at decade's end.

Yardeni has spent much of the last year as a self-described year 2000 bug "alarmist" and educator. He's leading an online conference on August 16, 500 days out from the critical new year, that will bring together infrastructure experts, economists, politicians, and other policy makers in a day-long conference call. The group will discuss the year 2000 bug's effect on power grids, agricultural systems, phone lines, stock markets, and more.

TechWeb Internet's John Borland asked Yardeni why he's sure the Y2K bug is so serious, and why he's so far ahead of other mainstream economists in forecasting a dire millennial future.

You were one of the first economists to predict really widespread effects from the year 2000 bug. Sketch out, if you would, what you think the most likely scenario is at this point.

Well, I first started to research the year 2000 problem seriously in the summer of 1997. At that time, I just put a 30 percent probability on a global recession in the year 2000.

But every day now we're just getting flooded with more and more news, and there's been more information coming out of the government and other sectors. Based on what I know today, I've been sequentially raising the odds of a global recession. I'm up to 70 percent now of the odds of a very severe global recession in the year 2000.

Can you compare the potential scale of the year 2000 bug on the financial sector to the effects of the Asian financial crisis?

Well, you know, in some ways, the Asian financial crisis and the recession is in some ways a warm-up act for some of the problems I see happening on a more global basis in the year 2000. I also believe the worst is not over in Asia. They've got a lot of problems there.

Basically I think that looking at the financial system in the year 2000, we're probably going to have a bear market in the U.S. and European stock markets, starting sometime in 1999 going into 2000. The big drop in stock markets in Asia may be a kind of a precursor to similar declines in Europe and the States.

Some of the folks who've been painting the most alarming pictures talk about people pulling all of their money out of banks, or pulling all their money out of stock markets just before 2000 or just at the end of '99. What do companies need to do to prevent this from happening?

Well, I'm the last one to counsel anybody to pull money out of the banks. I think the banks are going to be ready, and my advice to people is to open up a second or third checking account in another bank if you're concerned that there might be some issues with your getting accounting done right or the statements [done] properly.

The thing is, if you have a hard copy of your statements for November and December, nobody's going to lose money, and the Federal Reserve is going out of its way to make sure that our financial system remains as intact as possible, given the kinds of risks that exist out there.

On the other hand, I do think there is a lot of risk in the stock market. It's not my style to tell people to sell everything, and that's not what I'm saying even today, but I do think there will be a bear market that'll take the market down 30 percent. That's not doomsday, that's not the end of the world after the kind of bull market we've had. But you know, I think investors have to realize that especially after the bull market we've had, there's a lot of risk out there.

In the financial sector, how much do other countries' stock markets, other countries' banking systems, put ours at risk?

Well, you know we're all extremely interdependent, and of all the industries out there, probably one of the most interdependent has to be finance and Wall Street. We trade a lot of stocks and bonds and securities that are basically foreign assets. If there are any major disruptions in clearing systems in some of these countries, in Japan or in [South] Korea, or wherever else, that's going to be very disruptive to the global financial system.

It is a global financial system, so let's not get ourselves into believing that just because Wall Street gets it all fixed that there aren't going to be any problems as a result.

Do you think the U.S. government should be doing more overseas?

I do believe the U.S. government should be much more involved in getting the overseas situation straightened out.

You know, look at our history. We've never been really shy about using our military, political, economic power to pursue our national interests, sometimes it wasn't in the best interest of others. But here it's clearly in our best interest to have the rest of the world ready for the year 2000. It's clearly in everybody else's interests overseas to be ready for the year 2000.

I think the situation is so bad overseas, particularly in some of these emerging economies, that we really need to think about spending a lot more money in terms of providing people overseas with the resources they need to fix their problems to make sure that their electrical systems work, their telephone systems work, their airports work. Otherwise we're going to end up getting hurt by major problems overseas.

Could you give a concrete example of how something in a third-world country could ripple over here?

Well, apparently, there's a lot of issues overseas. Ironically, one of my competitors, Merrill Lynch, recently pointed out that they are very concerned about Telebras in Brazil. Of course that's the phone company over there, which is getting privatized.

A lot of the managers won't even be around in the year 2000. Their equipment is pretty old. Now, somebody has to really think through, what are the implications if you can't place a phone call to Brazil? What happens if you can't send a fax there? Brazil's important. They're a big exporter of grain. They're also a very important part of our global manufacturing just-in-time system.

So that's just one example of a system that's at risk in one country, and I think we have to recognize that that could spill over and create all kinds of disruptions on a global basis.

You talk about these survivalist folks, you're seeing more reports of these folks heading for the hills in preparation ...

Well, let's face it, survivalist stories are going to get some press. But let's recognize that's not the right reaction to this kind of problem at all. I tell my few survivalist friends that if they run off into the hills, all they're going to do is run into lots of other survivalists. And I think I'll be safer with my neighbors working things out than in the middle of nowhere with lots of other people that really don't belong there, kind of trying to figure out what to do next.