-Caveat Lector-
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From: Gary North <[EMAIL PROTECTED]>
To: [EMAIL PROTECTED] <[EMAIL PROTECTED]>
Date: Friday, 7 January 2000 15:35
Subject: Reality Check, #45
Gary North's REALITY CHECK
Issue No. 45
January 7, 2000
BEYOND THE ROLLOVER: ARE WE OUT OF THE WOODS NOW?
The rollover went by without a major breakdown
anywhere in the world, including all those Third World
nations, small businesses, and local governments that had
done almost nothing to fix Y2K. There was no 72-hour
storm. This was unexpected by everyone, most of all, me.
There were also no terrorist attacks, no viruses, no
nothing. But nobody blames the government for months and
months of "fear-mongering" over terrorism.
What there is, is broken code. Peter de Jager, whose
Web site just sold for $2.1 million, told the press this
week that the computerized operations of the world still
have not been proven safe and sound. Glitches are there,
waiting to happen, he says, and we should expect to put up
with them for months to come. Cory Hamasaki agrees.
But as for a breakdown, we're out of the woods.
Unless. . . .
EXPLAINING THE UNEXPLAINABLE
Here are basic issues that remain unanswered:
1. How did the programmers all finish on
time, all over the world, when this had
never before happened in any large-
scale software project?
2. How did enterprises that started late,
spent less, and had less experience in
mainframe programming all fix their
systems?
3. How reliable are systems that did not
receive any final testing?
4. How will industry-wide systems hold up,
even though there was no testing of
these huge systems?
5. How will the problems of undetected bad
data be solved?
Let me remind you of some reports that I find hard to
put together logically. They are examples of these overall
problem areas.
In May, 1998, a report on Japanese banks appeared. It
said that the largest 49 banks planned to spend -- future
tense -- $249 million. (WASHINGTON POST, May 20, 1998).
At that time, Citicorp had spent twice this. Bank of
America had budgeted $350 million. (London SUNDAY TIMES,
May 24).
A survey of 97 Japanese banks in August, 1998,
revealed that not one was compliant. Five refused to
respond. (BUSINESSTODAY.COM, Aug. 27).
In December, 1998, a report appeared that the 19
largest Japanese banks planned to spend (future) a billion
dollars on Y2K. (DAILY YOMIURI, Dec. 3).
In February, 1999, another report came out that said
that of the top 19 Japanese banks, only two were 75%
compliant. Half were 25% or less. (USA TODAY, Feb. 10).
Then, on September 1, the Bank of Japan announced that
674 banks were near compliance. (ASIABIZTECH).
This does not compute. Citicorp spent $950 million,
and it took four years. Last fall, we were being asked to
believe that banks as large or larger than Citibank went
from 25% compliance to 99% compliance in six months. Then
there was the matter of final testing.
So, I for one do not believe that the banking system
is out of the woods.
Let's talk about final testing. Our entire economy is
now in the final testing stage. A year ago -- even a week
ago -- there were mainframe computers that were still able
to operate in 1999 mode. If there was a glitch that shut
one down in a Year 2000 test, the system would not go down.
It was still 1999. Now it's 2000. What happens if a
glitch shuts a system down this year? What is the fall-
back position?
There were no big surprises on January 1, other than
the absence of big surprises. But in the future, say
Hamasaki, de Jager, and other mainframe programmers, there
will be surprises. Maybe they won't all be big. But in
the banking world, a little surprise in a large bank can
create big problems for other banks.
Y2K's simultaneity problem is now gone. It will be
one institution at a time, one bank at a time. This
reduces society's risk dramatically. Greenspan's 99+%
figure for compliance seems to have been reached. This has
to be for the entire international banking system.
And yet . . . how can we explain the success of the
Japanese banks? I can't do it. No one else is even
asking.
If 100% of the Japanese banks went from noncompliance
to compliance in six months, then why did the 20 largest
U.S. banks pay over $3 billion over a four-year period
years to fix Y2K? I know I am the only person who is
asking this question today. I ask it because the answers
do not make sense.
I am not trying to play games here. I honestly do not
understand the situation. Alan Greenspan in 1997 said that
banking could not survive with a mere 99% compliance. So,
did it achieve 99+% compliance? We do not know. Does it
really need 99+% compliance? We do not know.
My concerns over the Millennium Bug were based on my
belief that the interdependent systems could not all be
fixed in time, tested in time, and secured from bad data in
time. I had the banks in mind, above all. Today, we are
told that banking has no problems. The markets seem to
agree. But the technical means by which the largest banks
on earth -- the Japanese banks -- achieved 100% compliance
is not even discussed publicly.
VIOLATING THE LAW OF LARGE PROJECTS
I look around me and think, "How did I get fooled?"
Were the press reports on Japan wrong? Did U.S. banks use
Y2K as an excuse to upgrade their computers when the old
ones would have worked?
I do not believe that Y2K was a hoax. I never read
any report by any mainframe programmer who said, "This is a
hoax. Nothing will happen if we don't fix this."
I read Ed Yourdon's report, written in late December,
on the history of large-scale software projects. A
significant percentage of them come in late or are
cancelled. Always. Yet this time, all over the world,
they supposedly all came in on time. All of them.
How?
I am not a programmer. I have read the words of a lot
of programmers since late 1996. Not one of them indicated
that this law of large projects is false. Capers Jones
said it was true. So did all who commented on it. Many
cited Fred Brooks' mid-1970's book, THE MYTHICAL MAN-MONTH.
Large projects run late. Always.
But they seem to have finished on time this time.
Am I baffled? Yes. Do I have an explanation? Not a
good one. But here is the one, for now, that I believe.
They did not all come in.
We are looking at systems that did not get fixed.
They surely did not get tested for a year, as promised in
1998. They are incomplete.
Then how can they still be running at all? I have
only this answer, made up on the spot to fit the anomaly:
Y2K is not a fix-or-die technical problem, but a side
problem that has long-term negative effects, but is more
corrupting than catastrophic.
The only other answer I can come up with is this: Y2K
was always insignificant, but the programmers all lied in
order to get the money. This is the old "consultants'
hype" argument. The trouble is, across the world, not one
full-time mainframe programmer ever sounded the alarm by
saying, "Y2K is not a problem worth fixing."
There was money to be made, speeches to be paid well
for, and TV interview shows galore for one person to stand
up and announce, "Y2K is not a problem worth fixing."
There were more than 15 minutes of fame to gain by saying
this, but no full-time mainframe did. No CIO did. No
government official did.
The systems were not tested. This, we know. Now we
must sit back and wait. Will Y2K be a corrupting problem?
Systems will start getting fouled up. Noise will increase.
Or has Y2K been fixed? Then how is this possible? Or was
it never worth fixing? If so, then why did U.S. businesses
spend $90 billion to fix it?
I think Y2K remains a problem. But its form has
changed. It is now inside supposedly compliant systems,
undetected, ready to pass bad information to decision-
makers. It is not conceivable that it was completely
fixed. Programmers who have spent their lives working on
large projects say it has not been fixed, could not be
fixed. I believe them. We missed a show-stopping failure.
The erosion process has begun.
EROSION AND THE U.S. STOCK MARKET
Y2K will soon fade from the media. Glitches will not
be news. On January 6, East Coast airports suffered a
major FAA computer failure. Flights were delayed for
hours. But there was not much coverage of this. Fox News
ran a brief report as its headline. Nowhere in the story
was there any mention of Y2K. This is the shape of things
to come.
Erosion is not newsworthy. It will not be covered.
It will be visible, case by case, in our daily dealings,
but these will be non-simultaneous events. This, above
all, is THE surprise of Y2K: major problems did not appear
simultaneously, despite the deadline date. That fact has
killed Y2K as a media topic.
If Y2K is significant -- not a hoax, but not really
fixed -- then it will reduce corporate efficiency. This
will lower corporate earnings. The stock market will take
a hit, assuming, perhaps naively, that earnings affect
stock prices. They don't with Internet shares, but they do
-- or are thought to -- in the real world.
The Dow Jones Industrial Average touched 11,568.72 on
December 30. Then it fell back. Just one decade earlier,
to the week (maybe to the day), the Japanese stock market
peaked at just under 40,000. It has never come close to
30,000, except on its downward slide.
This 11,568.72 number is curious. Let me explain.
I am not a follower of Elliott Wave theory. It's too
complex a system for my abilities. But last May, I
received a detailed essay from a Jean Comeau of Quebec, a
commodities advisor -- registered, he says, in Chicago. He
wanted me to post the essay on my site. It was not Y2K-
related, I told him, so I didn't.
Yesterday, he sent it to me again. His essay said
that the Dow's top would be 11,550-11,600. He wrote,
"WAVE 5: WHEN DOW JONES HITS 11560 TO 11600
POINTS. END OF MAJOR BULL MARKET, PERIOD.
He then got even more specific:
Wave 5 or 1999 = Fibonacci number 34 times 339
equals 11526 plus 43 (crash low) equals 11569.
I do not pretend to understand this system. Robert
Prechter is an Elliott wave theory proponent. I read his
book, AT THE CREST OF THE TIDAL WAVE (1995), and I reviewed
it in the November, 1995 issue of REMNANT REVIEW. The
market has gone far above what he predicted. In fact, he
predicted a fall to Dow 1,000, beginning in late 1995 or
1996. But Mr. Comeau's number is highly specific. I do
not care that it is 0.28 above 11,568.72. It's close
enough.
Mr. Comeau is predicting a fall of over 5,000 points
in the Dow in the next two months. I think I will ask him
to do more writing for me as soon as it falls by 2,000.
I am no Elliott Wave aficionado. It's too technical
for my taste -- strictly numbers-based. I see no reason to
believe that Fibonacci numbers control stock market average
prices, especially one market, the Dow Jones Industrial
Average. I see no reason to believe that this index, and
not some other, is THE number to watch in preparation for a
worldwide depression. I think the Federal Reserve can
still do a lot to forestall a crash, such as buy S&P 500
futures. The money pouring into the stock market from
pension funds today is an ocean. Short of an unexpected
crisis -- such as a lock-up of a major bank's computer
system or default by some heavily leveraged hedge fund-- I
cannot imagine a fall this rapid, now that the Y2K rollover
is behind us.
Still, I will pay close attention to the Dow. Let's
see if it penetrates 11,569. If it does, will it then
penetrate 11,600? If it doesn't, I may develop a new
interest in Elliott Wave theory -- at least until the end
of February.
I also listen carefully to two other men who own
sophisticated proprietary stock trading systems that call
major reversals. Both of them are out of the market. One
of them has shorted it.
I will keep you informed of their opinions if the
overall stock market starts down. If the NASDAQ is the
leader, it looks bad for the general stock market. But
maybe investors are merely coming to their senses about
BUBBLE.COM. Of course, if they come to their senses about
price/dividend ratios, it's also bad news for the market.
WHY NO POST-Y2K MARKET BOOM?
Most people did not act on Y2K. They told pollsters
that they would, but they didn't. I think this is why the
rollover's good news has not created a boom in the U.S.
stock market. The Dow started down on Monday and continued
lower on Tuesday, then reversed. The NASDAQ was up on
Monday but hit hard on Tuesday. It was down again on
Thursday. In 3 days, it fell almost 10% from its high.
As Y2K optimism grew in the final weeks of 1999, the
U.S. stock markets reflected this. But the pessimism had
never been deep. So, we are back to fundamentals. The
fundamentals are these: The FED pumped up the money supply
in late 1999, and now it is unlikely to stoke the fires of
inflation. The money spigot will be tightened.
This is a presidential election year. Traditionally,
this means more fiat money to fuel an economic boom to get
the incumbent's party re-elected. But Mr. Clinton has just
reappointed Mr. Greenspan to another term as chairman. Mr.
Greenspan's career is going to be longer than Mr.
Clinton's. So, I do not expect the FED to play the
political game this year, not after the recent Y2K-related
expansion of money. Mr. Greenspan is no fan of "irrational
exuberance" in the stock market. This market boom -- the
NASDAQ especially -- has the marks of a financial bubble.
"Infomagic" has called it BUBBLE.COM.
FROM PREPAREDNESS TO COMMUNITY
You have been hit with the standard line: "God will
take care of us." The various justifications for refusing
to prepare will be with us for a long time. They will be
with us until times at last get tough long enough to remind
people that there are no free lunches, that easy street
always leads to a detour.
I thought easy street would hit a digital dead end.
So far, I have been proven wrong. So, I am readjusting for
the detour. Clinton's seven fat years are about to end.
We may not get seven lean years, but we're going to get
several. This debt-based boom has drained Americans of
their willingness to save. That is a bad sign.
If you followed the basics of a Y2K preparation
program, you are in a good position to deal with a
financial downturn. You have basic consumption goods. You
lowered your debt. You are out of the stock market. You
may have begun a small business. You have battened down
the hatches. You are less vulnerable to disruptions than
ever before.
Do you see this an advantage?
You have counted the cost. Y2K persuaded you to re-
examine your priorities. Things that may have been at the
top of your list have moved down. If you really thought
through what is most important to you, you are way ahead of
almost everyone you know. You are now in a position,
emotionally and economically, to begin to re-shape your
life. If you got off the consumerist treadmill by stocking
up on the basics, don't look back.
You have probably identified friends who are similarly
minded. You will be in a position to pull together when
times get tough -- and times will not stay in boom mode
forever . . . or even through 2000, I think.
You must pursue your plans with like-minded people.
Here is my recommendation now. Begin to build
relationships with those Y2K activists who demonstrated
that they took the problem seriously. Build a mailing list
of like-minded people. If you spot an interesting article
on the Web, e-mail it. Stay in contact. Have meetings. I
don't mean big meetings. I mean meetings with three or
four families.
Start sharing ideas on your plans for the future
locally. See if your plans mesh with others. Share
information.
I think this should be a long-term project. I have
already begun. I am planning to get together with the
other Y2K activists in our local church. I don't recommend
setting up a cell group to take over the church. On the
contrary, I recommend that the core group become a major
source of help for the church -- Y2K volunteers, if you
will.
Y2K has enabled you to identify people who share your
view of the world. Don't let this opportunity pass by. I
suggest as strongly as I can that you have a meeting soon.
Lick your wounds. Admit that the results were not what we
expected. But bear in mind that the code is still broken.
Broken code will have negative effects, though not the
visibly catastrophic ones that we expected, unless a crisis
hits a key institution that is deep into derivatives.
Why don't you sit down and call two or three of them?
Invite them over to talk about your plans, now that Y2K is
officially over, and how their plans might fit yours. It
is time to get trustworthy people around you.
If you lost your job tomorrow, who would you call for
counsel emotional and support? It is time to start
building relationships now.
END
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