It's a good time to buy stocks!

    means the worst may be over, especially for the
    tech sector, which showed signs of a recession
    well before other industries went into a
    collective tailspin.

    When six sages from fancy universities tell you
    what tech CEOs and their customers have been
    saying for months, you know things are about to
    turn up. The group has a tendency to be a little
    late to declare a recession. . . . "Duh" is the
    appropriate reaction to NBER's statement, which
    surprised absolutely no one.

    Oh, really?  How many expert columnists in the major
media and the press have you read who have been maintaining
steadfastly that the U.S. economy has been in a recession?
I can't think of one.  It sure wasn't on the financial TV
cable networks.  The blow-dry commentators have been
begging, pleading with the public not to believe any such
thing.  These people are professional cheerleaders who are
paid by the media to paint a happy face on the economy
because advertisers who pay the industry's salaries always
cut back on advertising budgets during recessions.

    If the economists had listened to the tech
    sector, it wouldn't have taken that long to
    figure out a recession was in the making.  In
    April, just a few days after NBER said the
    recession began, Cisco Systems CEO John Chambers
    was already talking about the equivalent of the
    100-year flood that whacked the
    telecommunications sector.  "The business
    environment that our segment of the IT industry
    is facing has never been more challenging,"
    Chambers said at the time.

    The tech sector's collapse was an easy call.  I made
that call in February and March of 2000.  I was virtually
alone at that point.  The NASDAQ's peak came on March 10.
The collapse was accompanied by denials from the media that
it was a collapse -- all the way down.  Finally came the
universal analysis: "The tech sector is not representative
of the economy as a whole.  Its collapse was an aberration.
And, by they way, it's time to get back in!"  The Party
Line has not changed.

    After all that, the NBER speaks: "The committee
    is satisfied that the total contraction in the
    economy is sufficient to merit the determination
    that a recession is underway."

    Thanks for the memo, guys.

    This C/NET report was written by some kid whose photo
indicates that he is about 30 years old.  He is a graduate
of the Columbia School of Journalism.  He makes it look as
though a panel of old fogy economists has only just figured
out that we are in a recession, so this just has to mean
that the recession is behind us.  He does not give the
reader the benefit of the truth, namely, that the NBER
always announces recessions retroactively.  

    If the NBER did not make these retroactive calls, the
government and the financial press never would admit that
there is, was, or had been a recession.  The NBER wisely
takes its time because the statistics that the government
releases are always slanted to the economic growth side.
Month after month, the government releases updates that
show that the growth rate was less than originally
reported.  The NBER is slow to provide its retroactive
analysis because the government's statisticians are
unwilling, ever, to report the bad news the first time.

    Now that the NBER has declared an official
    recession, the economy is bound to come back.  At
    the very least, NBER's proclamation should give
    battered tech investors new reason for hope that
    help is finally at hand.

news.cnet.com/news/0-1273-210-7994507-1.html?tag=bt_bh

    It's always the same: (1) We're not in a recession.
It's a good time to buy stocks.  (2) We were in a
recession, but now it's over or just about over.  It's a
good time to buy stocks.

    Then when is it a good time to sell stocks?  Never.

    In contrast, for someone who is willing to acknowledge
the economic facts, when is it a good time to buy stocks?
(1) At the bottom of a market.  (2) Whenever special
situations occur, and someone who knows what he (or she) is
doing spots this before most investors do.


HOW WAS I ABLE TO FORESEE THIS RECESSION?

    What I'm about to present, I present in order to alert
you to the obvious: if the experts understood Austrian
economic theory, and if they were willing to predict the
market and the economy in terms of this theory, they would
have offered a warning to get out of stocks in early 2000.
This was not a hard call to make.  That's why I made it.

    My secret was in recognizing the arrival of the
inverted yield curve.  It is the most reliable recession-
forecasting tool that there is.

    In the February, 2000, issue of my subscription-based
newsletter, REMNANT REVIEW, I ended with this warning:

         Tight money will produce rising short-term
    interest rates.  Beware the inverted yield curve,
    when 90-day T-bills command a higher rate than
    30-year U.S. bonds.  This is a classic indicator
    of recession.  It's not here yet, but 10-year
    bond rates have moved higher than 30-year rates.
    To "fight the tape" of the stock indexes is
    risky, but the general movement of conventional
    stocks is down.  There will be a rebound of the
    conventional stocks to match the bubble.com
    stocks, or a fall in the latter.  I think the
    bubble will burst.

    In the March 3 issue, released a week before the peak
of the NASDAQ index on March 10 (5040), I wrote:

         The inverted yield curve occurs late in
    economic expansions.  Inflationary pressures
    build.  Long-term rates go up.  Lenders demand an
    inflation premium in the rate, so as not to lose
    purchasing power.  Then, in expectation of an
    economic slowdown, long rates fall.  Borrowers
    must fund projects in order to complete them, so
    they borrow short-term money.  This creates the
    inverted yield curve.

         A pure inverted yield curve is not here yet:
    90-day T-bill rate above the 30-year bond rate.
    But there are signs that it is on its way.  The
    money supply is being shrunk.  This means less
    inflation; hence, a lower rate for long bonds.
    It also means tighter credit, i.e., higher short-
    term rates.  The FED is slowly raising the
    federal funds rate, the rate at which banks lend
    to each other.

    The other factor that convinced me that the end was in
sight for the NASDAQ was a price/earnings ratio in
December, 1999, over 206.  A buyer had to spend $206 to buy
one dollar in earnings -- and not all of this profit would
be sent to him as dividends.  This was an easy call.  

    Then where was the conventional financial press?  On
the sidelines, as always, cheering on buyers who were then
buying CISCO (every portfolio advisor's favorite) at $70 a
share.  Today, it's about $20.  In the April 5, 2000 issue
of REMNANT REVIEW, I asked rhetorically: "Is Cisco
Kidding?"

         One of the most popular Internet companies
    to buy is Cisco Systems.  It sells hardware for
    the Internet.  There is no doubt that it is a
    company with a huge growth potential.  It is
    growing 2.5 times faster than Microsoft is.  But
    investors pay for that widely perceived
    potential.  The P/E ratio is around 200.  There
    is no dividend.  It has a market capitalization
    of over half a trillion dollars -- three times
    larger than Dell Computer, and over two times
    larger than IBM, which has a P/E of 30.  It is
    now larger than Microsoft.  Am I to believe that
    Cisco Systems is a better buy than IBM?  

         Why would anyone buy this company's stock?
    Not for dividends, certainly.  Not because it is
    an unknown firm, ready for some spectacular move.
    Maybe someone would buy it because of the greater
    fool theory: someone else may buy it later for
    more money.  But, eventually, the greatest fool
    appears.  The game ends.  

    The game indeed ended within a few weeks.  Cisco
should have been in nobody's portfolio in April, 2000.
That stock was an accident waiting to happen.  But the
experts didn't see the obvious.  

    I began predicting the recession in this newsletter in
Issue #55 (October 3, 2000).  I based my prediction on the
arrival in July of a pure inverted yield curve: the
interest rate on 90-day T-bills was above the rate for 30-
year T-bonds.  By October, the inversion was no longer a
fluke.  

    I reprinted part of a 1989 promotion piece for my
subscription-based newsletter, REMNANT REVIEW, in which I
predicted a recession, based on this same indicator.  That
recession hit in 1990.  Here is what I wrote in REMNANT
REVIEW (December 1, 2000).  I cited the work of economist
and forecasting master James F. Smith.

                     * * * * * * * *

    Meanwhile, the inverted yield curve is till in force.
The 90-day T-bill rate is still higher than the 30-year T-
bond rate.  Consider the warning of Professor James F.
Smith of the University of North Carolina's Kenan-Flagler
Business School.  He is also the chief economist for the
National Association of Realtors.  In January, 1999, the
Wall Street Journal named Dr. Smith the best overall
forecaster among professional economists in the United
States.  This was the second time in three years that he
had received this honor.  In the March, 2000 issue of the
UNC Business Forecast, Dr. Smith wrote the following:

    . . . At some point in that process, bond
    investors will bid up the prices of longer term
    Treasury securities because they will be
    convinced that future inflation will be much less
    than current inflation. As that occurs, the
    Treasury yield curve will become fully inverted.

    My forecast is that that will happen in August
    2001. If that comes true then you can be nearly
    certain that just as night follows day and day
    follows night, the next recession will arrive in
    2002. . . . My forecast for that will not change
    to any closer date unless we see a fully inverted
    yield curve before August 2001.

    In that case, you can just move the recession
    date closer to the present by one month for each
    month that the inverted yield curve appears
    earlier than August 2001. For example, if the
    yield curve became inverted in September 2000,
    then the recession should arrive on June 16,
    2001.

    The yield curve went partially inverted in July: 90-
day rates over 10-year rates.  It went fully inverted in
October, ten months ahead of Dr. Smith's forecast.  If Dr.
Smith's forecast is correct -- and its highly specific date
indicates that he was exaggerating for comedy effect -- we
can expect a recession by the summer of 2001.

    But how accurate has this indicator been in the past?
It is the most accurate recession-forecasting indicator
there is.  Dr. Smith said this:

    Whenever you see this relatively rare phenomenon,
    which was last seen in 1989, and it persists for
    one month or longer, you can be virtually certain
    that the next recession will occur within 10-15
    months.

    This signal has never occurred without being
    followed by a recession since the creation of the
    Federal Reserve System on December 24, 1913.
    Conversely, the last time we had a recession in
    the U.S. that was not preceded by an inverted
    yield curve for U.S. Treasury securities was the
    one that began on May 16, 1923 and ended on July
    15, 1924.

                     * * * * * * * *

    Most of the financial commentators in the major news
media were completely unaware of this development in 2000.
The few who did comment on it dismissed it as irrelevant --
the most accurate recession-forecasting tool of all time.
They were wrong.  Again.

    They did not announce the arrival of the recession in
March.  They are barely discussing it today.  The focus is
now on Alan Greenspan, as usual.

    The FED's increase in the money supply in order to
reduce short-term rates is the main policy tool that it has
to reduce both the duration and intensity of a recession.
Its other policy tool -- very weak at this point -- is to
reduce reserve requirements for urban banks.  It has not
done this.  

    Greenspan has been trying to get the yield curve as
positive as he can: short-term rates far below long-term
rates.  But in recent weeks, the FED has put on the
monetary brakes.  Look at the Adjusted Monetary Base, the
one statistic that the FED can control directly by either
buying or selling assets.

www.stls.frb.org/docs/publications/usfd/page2.pdf

    Up until September 22, the monetary base was
skyrocketing.  Then the FED revered course.  Since October
3, there has been a 13% reduction -- quite large.  Over the
last year, the increase has been over 8%, but the FED has
called this to a screeching halt.

    What is the FED doing?  Gyrating.  It is trying to
avoid price inflation, yet it is also trying to inflate its
way out of the existing recession.  The key question today
is this:

    Will the FED's actions produce Greenspan's goal,
    namely, to pull the U.S. economy out of recession
    and also avoid price inflation?  

    My answer is simple: no.  He has to decide: inflation
or recession.  If the FED expands the money supply, this
will produce stagflation and, when the FED slows the rate
of monetary expansion, to another recession.  We are now in
a situation like we were in 1980-81: either one long
recession or multiple recessions.

    September 11 forced Greenspan's hand.  He thought he
had to inflate massively in order to forestall bank runs.
You can see this in the chart: the spike.  It is clear from
the contraction late September that he did not adopt this
expansionary policy as a counter to the recession, which
had been in force ever since March.  This was a post-attack
monetary policy.  Now the FED has reverted to a pre-
September 11 monetary policy.  It has had to contract the
monetary base in order to return to the status quo ante.

    If we can learn anything from the FED's reversal, it
is this: Greenspan is still worried more about price
inflation/stagflation than he is about the recession.  He
is ready and willing to inflate the money supply, but not
at a rate high enough to trigger price inflation.  He is
not willing to undermine the dollar for the sake of
overcoming the recession.  The accent is on monetary
inflation, but he is unwilling to risk serious price
inflation.  He is more willing to live with a mild
recession.  He will adopt a stop/go policy of monetary
expansion/contraction.  

    My conclusion: the days of ten-year economic booms are
over.  So are the days of doubling your money in a third-
party managed stock market mutual fund.

    The rest of the industrial world is in recession.  In
Asia, apart from China, it's already an economic disaster.
Japan is a basket case.  Its pump-priming, big-deficit,
Keynesian economic policies aren't working.  Price
deflation is high and getting worse.  Exports will put
pressure producers all over the world to keep prices down,
despite new money flowing into their respective economies.
The Japanese must export goods or fall into a full-scale
depression.  They will aggressively cut prices, cut the
value of the yen by expanding the money supply further, and
export whatever they can.  With Japan, it's export or die.

    It's great for consumers who have money to spend, and
who are willing to buy.  But there will be fewer of such
consumers in a month.  The squeeze of American producers
has only just begun.  So has the corporate profits
recession.

    This recession is being driven by falling profits.  It
is not being driven by reduced spending by consumers.  To
forecast a recovery, a rational economist should forecast
rising profits.  But it's hard to make a case for rising
profits in America today.  Price-cutting exports from Asia
will increase as the Asian recession increases.


REFUSING TO FACE REALITY

    The forecasting experts read each other's happy-face
analyses, and they think that their joint cheerleading
constitutes economic analysis.  Warren Buffett keeps
warning them that the days of easy money in stocks are
over, yet the entire profession -- salaried -- shrugs off
his warning.  "What does he know?  He's just an old man,
locked into the old economy."  A bunch of journalists whose
meager assets are tied up in their heavily mortgaged homes
and pension funds managed by people who can't beat the S&P
500 index dismiss the opinions of greatest stock market
investor of all time.  It's ludicrous, and it's universal.

    When I was a child, my mother read me the story of the
Little Engine That Could.  At age three, I knew the story
was a fake.  It has children looking forward to good things
to eat, and one of these good things is spinach.  This was
obviously adult propaganda.  

    Well, it still goes on.  Alan Greenspan is the little
engine that supposedly can.  "I think I can, I think I
can," he declares, and all of the Senators and Congressmen
except for Ron Paul repeat the mantra.  I think he can,
too: debase the currency.  But this will take time.

    Recessions are times of selling pressure.  Those
people who need cash sell assets at steep discounts.  The
auto industry is giving away money: 0% financing.  The
housing market has peaked, and in some areas, prices are
falling.  Yet the money supply is rising.  How can this be?

    The newly created money is flowing into near-cash
assets: short-term debt instruments.  Interest rates are
falling for short-term debt instruments.  Investors are
looking for safety.

    The Dow Jones Industrial Average has not approached
its 2000 high of 11,700.  Money from pension funds keeps
flowing into stocks, which has kept the bottom from falling
out of the market, but marginal stock buyers are on the
sidelines.  They still don't trust this market, nor should
they.  The P/E ratio is too high.  The public's debt level
to disposable income is the highest on record.  And another
statistic, the P/R ratio -- prices to retained earnings --
indicates that we have entered a decade or longer of low
stock market performance.


CONCLUSION

    Christmas spending will not make or break this
economy, nor will it make or break this stock market.  What
will make or break both is profits.  Until you see a
plausible case for rising corporate profits, you should
remain skeptical of the general stock market and the
general economy.