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To: Arik T.G. who wrote (561)	8/16/1998 3:44:00 PM
From: Sid Turtlman	Read Replies (1) \| Respond to of 686

I guess this must be a market bottom, because anytime I feel confident enough in my bearish we're-heading-for-a-depression case to show my face on this thread, the market takes off again. But basically, I still agree with most of the stuff I wrote on this thread a year ago. A lot of the trouble I saw coming is unfolding, although I never guessed that it would happen so unevenly, with much of Asia clearly in a depression, and the US doing relatively well. But I see nothing that challenges my basic concept, that booming equity markets throughout the 1980's and 1990's have induced an overinvestment in capacity of all kinds of goods and services, and that the overcapacity hasn't been obvious because the process of building the capacity stimulates demand, so supply and demand appear to be in balance. Just as high stock prices are a message to people to invest more, when there is too much capacity the system will cause lower stock prices as a message to invest less, and to close down excess capacity. Lower stock prices will cause a negative wealth effect, not so much from consumers feeling poorer and spending less, although that will happen, but from companies' profit margins being destroyed and causing a slashing of business investment. Margins are already under pressure with the US economy doing well. The heavy investments most companies have made in the last decade have shifted their cost structures toward being more fixed than variable, so when demand unexpectedly weakens, what are they gonna do, lay off the computers? No, they will just sit there and lose money, and cut prices to hold onto market share. I use the term depression rather than recession because the latter is about reducing excess inventories in the system, while a depression is about reducing excess capacity. That takes a lot longer to unfold, and requires not just bankruptcies, but actual capacity shutdowns. In other words, only when an awful lot of software engineers are driving cabs will the surviving software companies be able to make money. Cheery, aren't I? I don't think things will get that bad, but compared to people's expectations I think they will be pretty awful. The main question remains, when? A person could have predicted the same set of developments in 1928 and watched the market double before anything bad happened. I think next year this process will get underway, but that is just a hunch.