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A SCENARIO FOR YEAR 2002
Disclaimers
  • The numbers primarily are taken from this forum and library sources. Their truthfulness is not known. This posting is not a recommendation to buy or sell anything.


  • One cannot predict the future and that includes this essay. This essay is simply to project from past knowledge possible outcomes in the year 2002.


  • I do not receive nor expect to receive any remuneration from anyone for this essay. This essay is simply an effort on my part to better understand these markets and the science called economics.


  • Some may interpret this essay as just wishful thinking. This essay is not intended to be gloom and doom. There are always opportunities in the midst of crisis. May you find and benefit from some opportunity.

SUMMARY

While this projection is for the year 2002, the events suggested may well stretch into late 2003.

The first half of 2002 will see a deepening world wide deflationary recession with more countries going into recession. Recession being defined as the GDP for each country during the each three month period being less then the previous three month period. Prices will not rise in general much above an inflationary 3 percent rate.

The second half of 2002 is likely to see a very volatile world trade situation both in terms of prices, values, and trading volumes in nearly every market. In some cases it may overwhelm for a few days computerized trading capacities.

There is a high probability that sometime during the year, two or more terrorist attacks will occur with impacts contributing to a further world economic slow down. At least one nuclear weapon will be used in anger. The other attack will involve chemical or biological (other than anthrax). technology. These attacks will in part be sponsored by the news media almost encouraging copy cat like attacks. U. S. punitive laws to solve other perceived social and economic problems over the past decade have created U.S. home grown terrorists who will be participants.

These terrorist attacks are likely to turn America into a Fortress (or bunker) America mentality. U.S. citizens from new terrorist attacks realizing their government cannot guarantee their safety will panic and/or become increasingly distrustful of the U.S. govt. This distrust will be fueled by recently enacted legislation which compromises their privacy and government abuses of the power for other ulterior motives. Patriotism works for a while and then has little effect on disenfranchised public opinion.

The U.S. Underground economy begins to blossom with bartering and not reporting of income schemes becomes commonplace. Gold and silver will only be a part of the bartering arrangements. The dollar currency will still be used in small transactions. The U.S. public and world wide will batten down the spending hatches to cope in this world wide recession/depression period.

Trade wars between countries are likely to erupt.

Howe vs. Bank for International Settlement, suddenly goes forward concerning manipulation of gold and other markets by the government. The question of the U.S. still having a gold stockpiles becomes a political issue in the limelight for a short while and then hushed up. I personally would like to think otherwise.

Argentina and one other country of similar GDP defaults on debts. These defaults throw U.S. commercial banks into temporary chaos. Banking derivatives world wide begin to unravel. President issues executive orders to limit bank losses. "All sales are no longer necessarily final!"

JANUARY Through JUNE of 2001

U.S. STOCKS will for most part trade sideways and down with weekly rallies/declines of 400 DJIA points or more. By summer, the DJIA should be in the 8000 range.

U.S. REAL ESTATE bubble starts becoming unglued with some local areas seeing real estate prices declining 10% to 20%.

U.S. TREASURY SECURITIES prices will decline of 5% to 10% This is a response to Fed rates of 2% being an unacceptable return for investors. Foreigners will be selling treasuries, & U.S. assets for cash flow needs, to prop up their banks, economies, and concerns about U.S. negative real interest rates causing depreciation of their capitol. There will be a lack of U.S. citizens/corporations buying treasuries and a continued negative U.S. saving rates.

GOLD PRICES will remain in the $280 to $300 range due to market manipulations. Gold prices begin an upward creep beginning in March-April 2002 reaching $350 by July due to physical delivery demands.

SILVER PRICES will remain in the $4.10 to $5.00 range until mid year. 2001. Silver prices begin an upward climb with public announcement the U.S. Government entering the market purchasing silver for its commemorative coin program in March. Spin Doctoring that lots of silver exists and existing physical supplies meeting physical delivery will keep the market in sideways to upwards trading.

JULY 2002 Through DECEMBER 2002

The deflationary period of the previous six months turns into an inflationary period with inflation rates exceeding 5% per year in November/December time frame. World wide trade declines by 10% and trade wars may set in.

October and November will be the most volatile period of the markets.

Federal and State governments will continue in gridlock in regards to the economy unable and/or unwilling to take action in most cases. Much of their efforts will be political in nature with focus on placing blame elsewhere, pointing of fingers, and rhetoric.

U.S. STOCKS

  • DJIA will have declined from current 10800 level to less than 5,000
  • S&P 100 will have declined from current 1000 to about 500
  • NASDAQ will have declined from current 1500 to about 750

Simply put, Stocks Prices decline when there are more sellers than there are buyers? The current Stock Wealth effect on the economy will simply disappear.

U.S. Federal Government (PPT) Plunge Protection Team becomes ineffectual in keeping stock and bond prices up. The U.S. dollar decline as the supreme currency soon begins.

The stock market bottom will have been reached (projected for 2003) in the U.S. when the DJIA Price to earning ratio has decreased from a current ratio of 27 to 10 and the DJIA Book to market ratio has decreased from current 7.2 to about 1.2

The recession will become world wide and deeper. When the U.S. economy sneezes, many other countries such as Canada (U.S. largest trading partner) will catch pneumonia in an age of antibiotic resistance bacteria.

Foreign Stock exchanges will decline as well except for countries of high inflation. The Japanese stock index of 39,000 in 1980 has declined to about 10,000 and some have projected further declines to 5000. Countries of high inflation will see stocks increase, but purchasing power of the stocks will decline even faster.

The manufacturing capacity now at 75% of capacity will drop to 60%. There will be less buying by consumers due to:

  1. Fears of being unemployed or actually being unemployed.


  2. The 2,000 billion dollars of consumer debt and mortgages on homes will prevent most consumers from borrowing more to spend more.

Similarly there will be less vacation travel and entertainment.

Stock Market Sectors most likely to decline are:

TRANSPORTATION INDUSTRY & Entertainment Industry
- Airlines Railways Pipelines Cargo ships

ENTERTAINMENT TRAVEL & TOURIST INDUSTRIES
- Hotels Cruise Ships Casinos
- Tourist attractions Professional Sports

FINANCIAL & REAL ESTATE
- Insurance Banks Reinsurers Brokerages
- Office buildings - Vacation Properties
- Retirement communities - Manufacturing plants

MANUFACTURING & HIGH TECH
-Steel Industries Automobiles Aircraft
- Computers Cell Phones Pagers
- Software Internet Ship builders

MISCELLANEOUS - Retail stores
- Mining Companies primarily involved in base metals
such as iron, copper, zinc, lead, nickel

Due to lack of knowledge or no opinion, the direction of the following sectors is unknown and left to the reader.

Agricultural related industries
Energy Companies including electrical, natural gas, oil, and coal

Not all stocks will decline significantly. The following sector areas will find niche companies whose stocks may significantly increase. They include:

Pharmaceuticals (vaccines & medicine)
- Security & protection solar energy technologies
- Specialized Military products
- Precious Metals mining stocks
- Nano Technologies & Robotics

U.S. REAL ESTATE bubble has burst, and real estate prices in most areas will have decline 30% or more if buyers can be found. Low demand office and manufacturing space. Occupancy rates for business declines to 50%. Construction of new facilities & buildings, & homesgrinds to a near halt. Ten Percent of all homes and possibly farms (depending on area) are threatened with foreclosure .

U.S. TREASURIES will decline in value by at least 10% primarily to foreign holders selling them and lack of buying interest by Americans due to low rates or fears of inflation.

Reason for foreign selling & some estimated amounts of net sales 2002

$80 BILLIONS
JAPAN with a GDP of 2,900 billion dollars is in the third recession of the past 10 years. Bank of Japan (BOJ) has about 330 billion dollars of bad banking loans which it will have to write off. BOJ has another 700 billion of gray loans. Assuming half of the gray loans are also bad, this implies 680 billion dollars or about 1/4th of Japanese GDP. To keep the banks and economy from total collapse, BOJ will repatriate at least 20% of the 400 billion assets (Stocks, Treasuries & Bonds) in U.S. investment assets in the U.S.

$30 BILLION
ARAB OIL COUNTRIES. These countries are having cash flow problems from declining oil prices, lower oil demand, and deficit govt. spending. The Arab countries will repatriate about 10% of 300 billion U.S. (much of it in Treasuries) assets for cash flow problems.

$60 BILLION
CHINA (Hong Kong) suffering from inflation problems has about 300 billion U.S. in assets (a large percentage treasuries) China will repatriate 10% to help the banking system. Similarly, China for political purposes to demonstrate power plus distrust of foreign paper money will repatriate another 10%.

$40 BILLION
WESTERN EUROPE countries on balance will repatriate about 40 billion dollars primarily from fears and possible panic of a declining dollar value. There will also be some dumping of Treasuries simply on the fact that 2% return rate (interest) is deemed insufficient. Tangible investments such as precious metals and collectables become desirable in an era of a U.S. negative "real interest" rate.

$500 BILLION
UNITED STATES investors recognizing a negative "real interest" rate will exit the U.S. stock and bond markets in search of tangibles to preserve value. Others will exit the stock market due to need to pay down debts or to live on caused by unemployment reaching 10% in many areas. This will represent 5% of the Stock Market value (10,000 billion)

$700 BILLION
TOTAL of the above.

GOLD PRICES should rise from $350/oz range in July 2002 to over $500/oz in December 2002.

This is primarily due to increased demands for physical gold delivery in Asia and psychological fears of banking credibility/safety.

Gold has always been used in eras when few promises are kept.

Gold Mining in 2001 currently produces annually about 2,490 tonnes with a value of (66 million oz) x ($270/oz) = 17.8 billion dollars.

Gold Demand in 2001 continued to annually outstrip mined supply by 724 tonnes with a value of (19 million oz.) x ($270) = 5.2 billion dollars. The shortfall comes mostly from bank gold stocks (about 900 million oz. worldwide)

Total Gold demand in 2001 thus is approximately 22 billion dollars. (85 million oz).

China Gold Exchange Market starts slow on November 28th, 2001 and picks up in activity towards fall of 2002. Chinese individuals welcome owning gold and demand soars fueled by cultural fear and distrust of paper currencies including a current inflationary Chinese currency coupled with a shaky Chinese economy. Current annual demand of 160 tonnes (4,224,000 oz) [1.15 billion dollars @ $280/oz] in 2001 rises to 320 tonnes (8,420,000) [2.3 billion dollars @ $280/oz] in 2002.

India continues to import about 1/4th of the world mined goal (600 tonnes annually).

Japanese savers ($115,000 average savings) increase their gold purchases from 120 tonnes per year to 200 tonnes 1.4 billion dollars. These sales are to Japanese savers who fear depreciation of their savings due to negative real interest rates.

The U.S. banks distance themselves from gold. However the banks dealing in gold leasing schemes start to worry when physical gold demand increases and discover themselves vulnerable to a market corner from overseas particularly China (with over 300 billion in U.S. paper). Banking attempts to exit short positions in gold only drives gold prices upwards.

Royal family members of Arab oil countries may increase gold holdings held outside the country as a hedge against political instabilities. The Arab oil countries hold about 400 billion in U.S. paper) The Arab oil Countries are: The Gross Domestic Product values are in billions.

Beware of $40 billion of Arab oil money (or from China or Japan) suddenly going into gold and/or silver with delivery demanded! U.S. govt. and/or the economy could be held hostage for other demands from such transactions.

SILVER PRICES World Silver production in 2002 from mining and scrap silver recovery will decline by 10% from 800 million oz per year to about 720 million oz. This is primarily due to lower mining output by base metals of zinc, copper, and nickel where the mined silver is a byproduct. Lower metal demand and lower prices for the base metals from the economic slowdown/recession will force mine shutdown or reduced mine production to avoid bankruptcies.

World Silver demand will probably only fall 5% from 900 million oz/year to about 850 million oz due to lower demand from the world wide economic recession. Silver for photographic use will only fall 5%. Digital Cameras have yet to impact silver usage.

This still leaves a continuing deficit made up from silver stockpile withdrawals of 100 million oz per year. Silver stockpiles tend to be secretive. Only the COMEX Exchange publishes its stockpiles (102 million oz currently). One writer suggests Warren Buffet moved his 100 million oz. of silver to Europe. Another writer suggests Warren Buffet has sold his silver holdings. Published estimates of world silver stockpiles in 1996 were 350 to 500 million oz. (Goldfields of England & CPM of New York ). Stockpile drawdowns of 100+ million oz in 1997, 1998, 1999, 2000, and 2001 (Silver Institute published figures) suggests delivery of physical silver could be a problem by the end of 2002.

This could drive silver prices from current $4.10 range to $15 range in December 2002. A market panic caused by bank leasing of silver and physical delivery demands could cause silver prices of $70/oz akin to the 1980 silver bubble. Beware of Federal intervention (presidential executive orders?) into the Futures markets to avoid bank derivative losses. Margins could be raised to above the price of the contract.

China is said to mine about 28 million ounces of silver annually. It is believed China has increased refining capacity for scrap silver. China will begin stockpiling silver for industrial, political and military purposes thus withdrawing silver from the world market.

Chinese Government in seeking to take control of Taiwan, sees U.S. dollar treasuries (300 billion) not yielding a significant return, begins dumping them for tangible assets or paper yielding higher interest rates elsewhere.

Kodak stock values fell more than 20% in 2001, but Kodak silver usage only dropped 3 to 5%.

INDEED , 2002 WILL BE THE YEAR FOR HARD ASSETS.


"wallybently"
WallyBently@aol.com

November 22, 2001


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