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from Gilder Publishing THE FRIDAY LETTER e-mailed weekly, for friends and subscribers =================================== | http://www.gilder.com/ | Issue 41.0/January 18, 2002 HEADLINES: * The Week/ Bull or Bear in 2002? * Friday Feature/ 2002 hangs on these * Friday Bonus/ Internet Traffic Still Tripling * Storewidth Update * Poll Question/ Bull or Bear in 2002? * Readings * Subscribe / Unsubscribe Information ~~~~~~~~~~ THE WEEK/ Bull or Bear in 2002? By Jude Wanniski When I advised against holding equities early in 2001, with the Dow Jones Industrial Average at 11,000 or so, my bearishness pivoted on the monetary deflation I knew almost certainly the incoming George W. Bush administration would not address. The economic players assembled by the President had very definite ideas on what they planned to do, but ending the monetary deflation could not have been in their plans. They did not even know of its existence. My moderate bullishness for 2002 as a whole is based solely on my belief that the administration has been impressed that neither their demand-side tax cuts (putting money into people's pockets) nor Federal Reserve Chairman Alan Greenspan's eleven cuts in overnight interest rates seems to be working as intended. In addition, I strongly suspect there are now enough people -- who never did have great faith in that program -- in a position to surface with fresh ideas. If the economy is to emerge from recession, fresh ideas will be needed. All the happy talk we hear about the economic rebound that lies ahead -- in the first or second or third quarter -- comes from many of the same people who a year ago believed the tax cuts and rate cuts would have the stock market and economy booming by now. If they do not understand the mechanics of a monetary deflation, their opinions will not be terribly useful. Their "fresh" ideas will be no better than those that failed if they do not see that the dollar has become too strong relative to gold and commodities and must be devalued by roughly 20%. Investors are not really interested in whether the economy comes out of recession or not. They want to know if the value of financial assets will rise or fall, and then make their investments accordingly. It is possible for the stock market to decline even as the real economy increases in the production of goods and services. In other words, the statistics about Gross Domestic Product that govern the definition of recession may very well rise at some point in 2002, but without creating any excitement on Wall Street. Remember: one of the biggest years for GDP in the last century was 1933, a really dreadful year, but statistically a smidgeon better than 1932. Think of it this way: If economic output falls 50% in one calendar year and then grows 50% in the following year, there is not much reason for celebrating. If your wage falls from $1,000 per week to $500 per week (-50%), you will not really be that happy if in the following year it rises to $750 (+50%). The numbers we are looking at are not as bad as that, but if policymakers do not deal with the monetary deflation sooner rather than later, the DJIA's valiant struggle to stay above 10,000 will be fruitless. If the dollar/gold price hangs around $275 -- exactly where it was before the Fed began reeling off those eleven cuts in the fed funds rate -- the DJIA will have to give up a thousand points during the year. Early in 2001, with gold at $265, we reckoned the DJIA would find itself around 8500 by the end of March 2002. It got to that level earlier -- in September 2001 -- but only because of the increased risks associated with the terrorist attacks. We did become bullish that the DJIA would rebound as those risks dissolved, but noted we would still confront the deflation, limiting any upside. Our primary job is to get the direction of the markets right, not to pinpoint the various equity indices. But we certainly would not be surprised to see the DJIA at 8500 three months from now if there is no policy change. The first online issue of Jude Wanniski's Supply Side Investor posted yesterday for subscribers. If you have yet to experience Jude Wanniski, then Do Not Pass Go and Do Not Collect $200, Go Straight to https://www.gilder.com/supplysideinvestor/ for a Special, Half-Off Introductory Offer. Also, if you haven't already, make certain you read "The Deflation Monster," http://www.gilder.com/AmericanSpectatorArticles/Deflation.htm =-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=- Profit From The Market Recovery With The Best Names In Technology. Since October 1st, all companies in the Hager Technology portfolios are up an average 67%. Since 1986, the Hager portfolios have earned an annualized return of 30.8%, while outperforming the Dow by 1530%. Visit http://www.fredhager.com/ to learn more. ~~~~~~~~~~~~~~~~ FRIDAY FEATURE/ 2002 hangs on these Rich Karlgaard, Forbes Magazine Spring thaw, anyone? We all hope. But in the spirit of "we can't get better until we know what's wrong with us," let us lay the patient out on the table and behold the odd, even contradictory symptoms of malaise: *The U.S. appears to be awash in liquidity. At year's end its people and institutions held a record $4.3 trillion in cash and money market funds. Yet the economy is hip deep in its worst downturn since 1982. *Capital spending and investment have slowed to a trickle, yet consumer spending remains oddly robust. *The Federal Reserve in 2001 spiked the money supply by 10%. Yet the dollar has remained curiously strong against other currencies and practically every commodity. What the heck is going on? Is our economic sickness a result of contraction or deflation? Huge question. The answer policymakers decide upon may determine the outcome of 2002. Experts can argue the facts either way -- and they have. Most supply-siders, such as Steve Forbes, George Gilder, Jude Wanniski, David Malpass and Brian Wesbury, as well as a few exotics such as Paul Krugman, have made the case for deflation. Others, including Milton Friedman, James Grant and the Bush Administration, say the slowdown is owed to a good, old-fashioned contraction resulting from loose money and overexpansion during the 1995-2000 champagne years... Whether the U.S. economy is afflicted principally by a contraction or deflation is, literally, a trillion-dollar question. If it's contraction, the economy will recover on its own, without further Fed intervention. In fact, it may have begun to do so already. But if the problem is deflation, as I suspect it is, look out. We are in for a longer siege -- for as long as it takes the Fed to counter the deflation. "What else?" you ask. Open the spectrum. Get the full story from our good friend Rick Karlgaard on Forbes.com, http://www.forbes.com/forbes/2002/0121/031.html?_requestid=56991. Also, Richard has just accepted our invitation to attend the Storewidth 2002 Conference, http://www.storewidth.com/conferences/. Stay tuned for further exciting developments. ~~~~~~~~~~ GOING, Going, going, but not quite gone yet ... We still have a limited number of tapes and CDs from our 2001 Conferences -- Dynamic Silicon Conference, Powercosm 1 and 2, Storewidth, and the Gilder Technology Research Conference. Each set has 10 to 12 tapes and covers three days of conference material. Go to https://www.gilder.com/tapes and check out the great deals. ~~~~~~~~~~ FRIDAY BONUS/ Internet Traffic Still Tripling Neither a weakening economy nor the U.S. terrorist attacks has done anything to stunt the growth of traffic crossing the Internet, according to a Larry Roberts, one of the Internet's chief original architects and now chief technology officer for San Jose, Calif.-based Caspian Networks. In fact, traffic continues to triple each year, http://www.newsbytes.com/news/02/173707.html Review Dr. Roberts' Traffic Analysis presentation and get all the facts and figures (PowerPoint software required) http://www.caspian.com/library/presentations/traffic/Internet_Traffic_011602.ppt ~~~~~~~~~~ STOREWIDTH UPDATE Check it all out at The Storewidth 2002 conference is less than10 weeks away and the high-profile list of speakers continues to grow. Drop by http://www.storewidth.com/conferences/ to check out the agenda and see what about this conference is attracting the most revered minds in storage and networking from all corners of the globe. In this past week, alone, we've added a phenomenal group of additional speakers, like Listen.com Founder and Chairman, Rob Reid and Mike Luby of Digital Fountain, along with representatives from Compaq, Extreme, Gadzoox, Corvis and Adaptec. Our agenda has, in fact, attracted so much attention, that George was forced to tack a BONUS day onto the conference and the father of the Ethernet, Bob Metcalfe, has signed on to MC the event! It doesn't get much better than this. Remember, the venue is intimate and seating is limited. Don't be shut out of this not to be missed event. Register today at http://www.storewidth.com/conferences/register.php. =-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=- Gilder.com Poll: The fall of Enron is: A scandal in the making: 56% Just a business failure: 44% Up Next: Bull or Bear in 2002? Let us know at http://www.gilder.com/ ~~~~~~~~~~~~ READINGS Conexant Powers Ahead http://www.nytimes.com/reuters/technology/tech-tech-conexant-earns.html Shrugging Oracle's Software http://news.cnet.com/news/0-1007-200-8507929.html?tag=mn_hd Sun Micro's McNealy http://news.cnet.com/html/ne/vs/0-1004-200-8247803.html?tag=st.ne.0-1004-200-8247431.vs.0-1004-200-8247803 Microsoft's HomeStation http://news.cnet.com/news/0-1006-200-8495172.html?tag=mn_hd Intel Report Signals Recovery http://www.newsfactor.com/perl/story/15813.html Qualcomm's gpsOne Technology http://www.pcworld.com/news/article/0,aid,80085,00.asp LSI Exits http://www.informationweek.com/story/IWK20020116S0004 Dubious On Dell http://www.businessweek.com/bwdaily/dnflash/jan2002/nf20020115_3976.htm Broadband Dreams http://www.cei.org/gencon/016,02297.cfm Foliage-proof Fixed Wireless http://news.cnet.com/news/0-1004-200-8505683.html?tag=cd_pr Fixed Wireless Getting Popular http://www.internetnews.com/wireless/print/0,,10692_954801,00.html Nokia's Jorma Ollila http://news.ft.com/ft/gx.cgi/ftc?pagename=View&;c=Article&cid=FT3DLAO0IWC&live=true&tagid=ZZZPCGI2B0C&subheading=telecoms Handhelds Betting On Wireless http://news.cnet.com/news/0-1006-200-8492718.html?tag=mn_hd MSFT Getting Serious On Security http://www.computerworld.com/storyba/0,4125,NAV47_STO67461,00.html Black Hawk Downloaded http://www.nytimes.com/2002/01/17/technology/circuits/17VIDE.html -=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- FRIDAY LETTER STAFF ~~~~~~~~~~~~~~~~~~~~~~~ Dave Dortman (ddortman@gilder.com) John Hammill (jhammill@gilder.com) Aaron Charlwood (acharlwood@gilder.com) CONTRIBUTORS THIS WEEK: Mark Ziebarth, John Hammill, Dave Dortman, Sandy Fleischmann, Aaron Charlwood ADVERTISING INFORMATION ~~~~~~~~~~~~~~~~~~~~~~~ The Friday Letter is mailed each week to more than 150,000 subscribers and friends of Gilder Publishing, including industry leaders, financial professionals and individual investors. For information about advertising, contact Brian Cole, VP Business Development at bcole@gilder.com, tel 860-434-0614. FEEDBACK AND PROBLEMS ~~~~~~~~~~~~~~~~~~~~~ Send letters to the editor to Fridayletter@gilder.com For technical problems, please e-mail Fridayhelp@gilder.com You can also contact us via: Gilder Publishing, Customer Service 888-484-2727; outside the U.S.1-413-644-2100 1-413-644-2123 (fax) =-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=- The Friday Letter is published weekly for subscribers and friends of Gilder Publishing. If someone you know would enjoy it, please feel free to forward a copy. To SUBSCRIBE please visit http://www.gilder.com/ =-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=- Copyright 2002 Gilder Publishing LLC --- You are currently subscribed to gilder-technology-report as: alewis@ect.enron.com To unsubscribe send a blank email to leave-gilder-technology-report-661837S@earth.lyris.net
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