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Issue 41.0/January 18, 2002

HEADLINES:

* The Week/ Bull or Bear in 2002?
* Friday Feature/ 2002 hangs on these
* Friday Bonus/ Internet Traffic Still Tripling
* Storewidth Update
* Poll Question/ Bull or Bear in 2002?
* Readings
* Subscribe / Unsubscribe Information

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THE WEEK/ Bull or Bear in 2002?
By Jude Wanniski

When I advised against holding equities early in 2001, with the Dow Jones
Industrial Average at 11,000 or so, my bearishness pivoted on the monetary
deflation I knew almost certainly the incoming George W. Bush
administration would not address. The economic players assembled by the
President had very definite ideas on what they planned to do, but ending
the monetary deflation could not have been in their plans. They did not
even know of its existence.

My moderate bullishness for 2002 as a whole is based solely on my belief
that the administration has been impressed that neither their demand-side
tax cuts (putting money into people's pockets) nor Federal Reserve
Chairman Alan Greenspan's eleven cuts in overnight interest rates seems to
be working as intended. In addition, I strongly suspect there are now
enough people  --  who never did have great faith in that program  --  in
a position to surface with fresh ideas. If the economy is to emerge from
recession, fresh ideas will be needed. All the happy talk we hear about
the economic rebound that lies ahead  --  in the first or second or third
quarter  --  comes from many of the same people who a year ago believed
the tax cuts and rate cuts would have the stock market and economy booming
by now. If they do not understand the mechanics of a monetary deflation,
their opinions will not be terribly useful. Their "fresh" ideas will be no
better than those that failed if they do not see that the dollar has
become too strong relative to gold and commodities and must be devalued by
roughly 20%.

Investors are not really interested in whether the economy comes out of
recession or not. They want to know if the value of financial assets will
rise or fall, and then make their investments accordingly. It is possible
for the stock market to decline even as the real economy increases in the
production of goods and services. In other words, the statistics about
Gross Domestic Product that govern the definition of recession may very
well rise at some point in 2002, but without creating any excitement on
Wall Street. Remember: one of the biggest years for GDP in the last
century was 1933, a really dreadful year, but statistically a smidgeon
better than 1932. Think of it this way: If economic output falls 50% in
one calendar year and then grows 50% in the following year, there is not
much reason for celebrating. If your wage falls from $1,000 per week to
$500 per week (-50%), you will not really be that happy if in the
following year it rises to $750 (+50%).

The numbers we are looking at are not as bad as that, but if policymakers
do not deal with the monetary deflation sooner rather than later, the
DJIA's valiant struggle to stay above 10,000 will be fruitless. If the
dollar/gold price hangs around $275  --  exactly where it was before the
Fed began reeling off those eleven cuts in the fed funds rate  --  the
DJIA will have to give up a thousand points during the year. Early in
2001, with gold at $265, we reckoned the DJIA would find itself around
8500 by the end of March 2002. It got to that level earlier  --  in
September 2001  --  but only because of the increased risks associated
with the terrorist attacks. We did become bullish that the DJIA would
rebound as those risks dissolved, but noted we would still confront the
deflation, limiting any upside. Our primary job is to get the direction of
the markets right, not to pinpoint the various equity indices. But we
certainly would not be surprised to see the DJIA at 8500 three months from
now if there is no policy change.

The first online issue of Jude Wanniski's Supply Side Investor posted
yesterday for subscribers. If you have yet to experience Jude Wanniski,
then Do Not Pass Go and Do Not Collect $200, Go Straight to
https://www.gilder.com/supplysideinvestor/ for a Special, Half-Off
Introductory Offer.

Also, if you haven't already, make certain you read "The Deflation
Monster," http://www.gilder.com/AmericanSpectatorArticles/Deflation.htm
=-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-
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~~~~~~~~~~~~~~~~
FRIDAY FEATURE/ 2002 hangs on these
Rich Karlgaard, Forbes Magazine

Spring thaw, anyone? We all hope. But in the spirit of "we can't get
better until we know what's wrong with us," let us lay the patient out on
the table and behold the odd, even contradictory symptoms of malaise:

*The U.S. appears to be awash in liquidity. At year's end its people and
institutions held a record $4.3 trillion in cash and money market funds.
Yet the economy is hip deep in its worst downturn since 1982.

*Capital spending and investment have slowed to a trickle, yet consumer
spending remains oddly robust.

*The Federal Reserve in 2001 spiked the money supply by 10%. Yet the
dollar has remained curiously strong against other currencies and
practically every commodity.

What the heck is going on? Is our economic sickness a result of
contraction or deflation? Huge question. The answer policymakers decide
upon may determine the outcome of 2002. Experts can argue the facts either
way -- and they have. Most supply-siders, such as Steve Forbes, George
Gilder, Jude Wanniski, David Malpass and Brian Wesbury, as well as a few
exotics such as Paul Krugman, have made the case for deflation. Others,
including Milton Friedman, James Grant and the Bush Administration, say
the slowdown is owed to a good, old-fashioned contraction resulting from
loose money and overexpansion during the 1995-2000 champagne years...

Whether the U.S. economy is afflicted principally by a contraction or
deflation is, literally, a trillion-dollar question. If it's contraction,
the economy will recover on its own, without further Fed intervention. In
fact, it may have begun to do so already. But if the problem is deflation,
as I suspect it is, look out. We are in for a longer siege -- for as long
as it takes the Fed to counter the deflation.

"What else?" you ask. Open the spectrum. Get the full story from our good
friend Rick Karlgaard on Forbes.com,
http://www.forbes.com/forbes/2002/0121/031.html?_requestid=56991. Also,
Richard has just accepted our invitation to attend the Storewidth 2002
Conference, http://www.storewidth.com/conferences/. Stay tuned for further
exciting developments.
~~~~~~~~~~
GOING, Going, going, but not quite gone yet ...
We still have a limited number of tapes and CDs from our 2001 Conferences
--  Dynamic Silicon Conference, Powercosm 1 and 2, Storewidth, and the
Gilder Technology Research Conference.  Each set has 10 to 12 tapes and
covers three days of conference material. Go to
https://www.gilder.com/tapes and check out the great deals.
~~~~~~~~~~
FRIDAY BONUS/ Internet Traffic Still Tripling
Neither a weakening economy nor the U.S. terrorist attacks has done
anything to stunt the growth of traffic crossing the Internet, according
to a Larry Roberts, one of the Internet's chief original architects and
now chief technology officer for San Jose, Calif.-based Caspian Networks.
In fact, traffic continues to triple each year,
http://www.newsbytes.com/news/02/173707.html

Review Dr. Roberts' Traffic Analysis presentation and get all the facts
and figures (PowerPoint software required)
http://www.caspian.com/library/presentations/traffic/Internet_Traffic_011602.ppt

~~~~~~~~~~
STOREWIDTH UPDATE
Check it all out at  The Storewidth 2002 conference is less than10 weeks
away and the high-profile list of speakers continues to grow. Drop by
http://www.storewidth.com/conferences/ to check out the agenda and see
what about this conference is attracting the most revered minds in storage
and networking from all corners of the globe. In this past week, alone,
we've added a phenomenal group of additional speakers, like Listen.com
Founder and Chairman, Rob Reid and Mike Luby of Digital Fountain, along
with representatives from Compaq, Extreme, Gadzoox, Corvis and Adaptec.
Our agenda has, in fact, attracted so much attention, that George was
forced to tack a BONUS day onto the conference and the father of the
Ethernet, Bob Metcalfe, has signed on to MC the event! It doesn't get much
better than this.

Remember, the venue is intimate and seating is limited. Don't be shut out
of this not to be missed event. Register today at
http://www.storewidth.com/conferences/register.php.
=-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-
Gilder.com Poll: The fall of Enron is:
A scandal in the making: 56%
Just a business failure: 44%

Up Next: Bull or Bear in 2002?
Let us know at http://www.gilder.com/

~~~~~~~~~~~~
READINGS
Conexant Powers Ahead
http://www.nytimes.com/reuters/technology/tech-tech-conexant-earns.html

Shrugging Oracle's Software
http://news.cnet.com/news/0-1007-200-8507929.html?tag=mn_hd

Sun Micro's McNealy
http://news.cnet.com/html/ne/vs/0-1004-200-8247803.html?tag=st.ne.0-1004-200-8247431.vs.0-1004-200-8247803


Microsoft's HomeStation
http://news.cnet.com/news/0-1006-200-8495172.html?tag=mn_hd

Intel Report Signals Recovery
http://www.newsfactor.com/perl/story/15813.html

Qualcomm's gpsOne Technology
http://www.pcworld.com/news/article/0,aid,80085,00.asp

LSI Exits
http://www.informationweek.com/story/IWK20020116S0004

Dubious On Dell
http://www.businessweek.com/bwdaily/dnflash/jan2002/nf20020115_3976.htm

Broadband Dreams
http://www.cei.org/gencon/016,02297.cfm

Foliage-proof Fixed Wireless
http://news.cnet.com/news/0-1004-200-8505683.html?tag=cd_pr

Fixed Wireless Getting Popular
http://www.internetnews.com/wireless/print/0,,10692_954801,00.html

Nokia's Jorma Ollila
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3DLAO0IWC&live=true&tagid=ZZZPCGI2B0C&subheading=telecoms


Handhelds Betting On Wireless
http://news.cnet.com/news/0-1006-200-8492718.html?tag=mn_hd

MSFT Getting Serious On Security
http://www.computerworld.com/storyba/0,4125,NAV47_STO67461,00.html

Black Hawk Downloaded
http://www.nytimes.com/2002/01/17/technology/circuits/17VIDE.html
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FRIDAY LETTER STAFF
~~~~~~~~~~~~~~~~~~~~~~~
Dave Dortman (ddortman@gilder.com)
John Hammill (jhammill@gilder.com)
Aaron Charlwood (acharlwood@gilder.com)

CONTRIBUTORS THIS WEEK: Mark Ziebarth, John Hammill, Dave Dortman, Sandy
Fleischmann, Aaron Charlwood

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