History is littered with predictions which never came to pass. These predictions, posted December 31, 2001, will remain, untouched, for the duration of the year. We will review them at the end of 2002.
Predictions 2002
SEATTLE - 31 December 2001

Chart Courtesy Elliot Wave International
"I see nothing in the present situation that is either menacing or warrants pessimism ...
I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

Unlike Mr. Mellon's Prediction of 72 years ago, it is D2's standing position that the future is quite menacing and warrants a fair deal of pessimism. We see no grounds for a quick recovery in business activity. Instead, we see: 1. America's War on Terrorism will expand to include other countries as targets. The Taliban is gone from Afghanistan and the terror camps are closed, but America remains under threat. Bush Jr. will be looking to scratch his itchy trigger finger, and Iraq looks like the next good bet for a number of reasons: He can get back for his dad on Saddam. He can use war as an attempt to stimulate the sagging economy. Best of all, war coverage serves as an easy way to divert the public's attention from a more pressing problem: the economic crisis at home.

2. There will be another major terrorist attack on the Western World. The Department of Defense predicts as much, stating that the likelihood of another attack on America is 100%. It is one thing to accept this as truth, it is quite another to experience it, and to deal with the fallout. It is bad for markets, bad for social mood, and bad for your investments if you have yet to restructure them for times of war and uncertainty.

3. The uncertainty caused by 1 & 2 means no economic recovery for the U.S. or the world in 2002. 2002 will be a net negative year for growth in U.S. and world GDP. Relative stability is required for economic growth. This is why there is no stock market in Afganistan; uncertainty is bad for growth.

4. Reflecting #3 in the stock market, major domestic blue chip averages, with the possible exception of the NASDAQ, will hit fresh, multi-year lows. (The Elliott Wave. pattern currently displayed in NASDAQ suggests a possible counter-trend rally, but this is unclear.) What is clear is that the NASDAQ, the most speculative and highly leveraged index was the first and hardest to fall - down 60% from its peak. At this writing, the Dow is down only 14%, and the SPX down about 25% from their respective Y2K peaks. Both of these markets are likely to do some catch up with the NASDAQ on the downside.

5. Minimum downside target for the DJIA: 7000

6. Minimum downside target for SPX: 850

7. The U.S. Dollar will weaken on international currency markets as investors grow tired of the war and lose patience with the stagnant economy. As a result, both the Euro and gold will appreciate significantly (15% +) against the dollar. Gold will push above its long time resistance at $300/oz, and the Euro should reach par with the dollar in 2002.

8. As a result of #7, inflation will return to the U.S. Economy in 2002.

9. Just as 2000 saw the initial crack in the over inflated NASDAQ, 2001 saw the first cracks in the Blue Chip indices, 2002 will see the first cracks in the previously immune housing market. U.S. Housing prices will fall in 2002. The housing market has replaced the NASDAQ as the most speculative and leveraged market in the United States. Rising interest rates (i.e. inflation) will put a damper on new home construction & sales, and the market will see a glut homes coming to market from unemployed/underemployed people unable to keep up with mortgage payments. The dominoes will begin to fall, creating a downward spiral in housing prices.

Remember, good traders and good investors take all information into account and always hedge their bets.  In a snappy response to a senator who charged that he was inconsistent with his earlier positions, John Maynard Keynes replied, "When information changes, I change my mind. What do you do?"
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