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A Year 2 Kill

Originally published at About.com - January 25, 1999. The original article had a lot of links to articles and websites. Most have since disappeared but some remain and are worth checking out if you're curious. I have retained this article in these archives because of their historical interest.


True story: A mom was looking for her nine year old daughter and couldn't find her. After searching the house, she finally found her sitting in her bedroom with the lights out in the darkness. "Whatever are you doing sitting here in the dark?" asked Mom. "

"Practicing for the Year 2000 computer crash," came the reply.

It's only January and already apocalyptic visions of the millennium are scaring the bejeebers out of nine year olds. Not just nine year olds either. A quick look through the Internet will reveal that doomsday scenarios are alive and well and multiplying like flies.

On the other hand, there are many sober and reflective sites that, while not spelling out the end of the world as we know it, do argue that we may encounter some serious disruptions in our personal lives as a result of the so-called Y2K bug. And there are others who don't think Y2K amounts to much of a problem at all.

Where does the truth lie? Should we be worried? What can we do to protect our investments? Can we, in fact, profit from Y2K?

We won't know with absolute certainty until the Year 2000. You might say we have a Year 2 Kill before we find out. But in the meanwhile, I'll give a brief overview of the problem with links so you can explore the question in more depth yourself. And I'll wrap up with what some financial analysts are saying about Y2K's possible impact on investments.

An Overview of the Y2K Problem

There has been so much written about Y2K you could start now and read until the Year 2000 and still not read it all. So I'll keep this brief. Back in the sixties companies started computerizing their operations. The machines were large cumbersome beasts called mainframes. These expensive machines did not come with ready to run programs. They were custom programmed for individual businesses. Memory was expensive, so programmers cut corners by using only the last two digits for the year in dates.

These programmers figured their programs would be obsolete by the Year 2000. Unfortunately, many of these old computer programs are still in service. When the year 2000 arrives, they will think it is the year 1900. This will cause all sorts of problems. An excellent article by Peter de Jager in the current Scientific American explains the problem (and possible solutions) in some detail.

On top of that, there are billions of miniature computers called embedded chips. About 1-4% of them have date functions. Many of these chips employ the same two digit short cut so these chips will encounter the same problems.

What sort of problems? Nobody really knows. The suggestions run the gamut from the phone company billing you for 100 years of service to planes falling out of the sky because a scheduled computer-automated function does not happen.

Can the problems be fixed? Some analysts say yes. Others say the problems are too large and too all-encompassing to fix.

There are two distinct camps on the Y2K analyst landscape. One camp is actively working to make corrections, rewrite code, replace old computers with new, make emergency plans and so forth. They acknowledge the problem is serious and potentially catastrophic. And they are pro-actively working to minimize the outcome. These are the moderate Y2K analysts.

The other camp argues that it is impossible to fix the problems. First they argue that there are not enough programmers to go through millions of lines of code. Secondly, they say there is not enough time to test all the embedded chips. They predict the complete failure of our banking system, our communications systems, our energy supply, and even our food supply. They argue that the only thing people can do to ensure their safety and survival is to retreat to the wilderness with a huge collection of supplies and cash and armed to the teeth. They predict the "end of the world as we know it" and even have a website called that. I call this camp the apocalyptics.

Then there are sundry analysts in between.

The Players

Awareness of the problem was first brought to the attention of the general public by a Canadian, Peter de Jager, in an article called Doomsday 2000 published in ComputerWorld in September 1993. With seven years to the millennium, de Jager wanted to alert people to the problem and spur some remedial action. But corrective measures were slow in coming. Just like kids who wait to the last minute to do their homework, business and government waited until the last minute to start fixing things. Last year the remedial work got under way in earnest.

Meanwhile, others started joining in the chorus of Y2K warnings. Ed and Jennifer Yourdon wrote a book called Time Bomb 2000, published in 1998 and revised for 1999. A software engineering consultant like de Jager, Yourdon's credentials are impressive and this lends some weight to his views on the subject. He is a pessimist who thinks we'll see runs on banks, electrical power failures, a long term stock market collapse and more. His website is filled with his writings and links to other resources (update note: the website is still there but the articles aren't).

Ed, however, is hardly the most apocalyptic Y2K pundit. While a pessimist, Yourdon does think the Y2K problem can be alleviated, if not fixed outright. The trophy for Best Doomsday Prophet goes to Gary North, an historian.

North not only holds the most pessimistic views on Y2K, he believes the problems are unsolvable in nature. As he puts it, "I'm saying that it's over. Right now. It cannot be fixed." The problem, he says, is systemic so we better head for the hills. North has over 3000 pages on his website to support his arguments. But some have questioned his motives.

Steve Davis is the co-author of Y2K Risk Management, a book looking at legal and insurance issues and contingency planning for Y2K. His expertise is at developing emergency and community preparedness programs. Davis also hosts an extensive Y2K website "dedicated to understanding and minimizing the impact of the Y2K problem". His website includes a page debunking the Doom and Gloomers. He believes they are a "threat to society" as "their hyperbole may lead to public panic".

Davis points out that North is a leading spokesman for a fanatical religious movement called Reconstructionism that longs to see the collapse of the U.S. government so it can be replaced by a strict theocracy. He quotes North as saying "So, of course I want to see Y2K bring down the system, all over the world. I have hoped for this all of my adult life. In my view, Y2K is our deliverance".

Other articles critical of North have appeared in Wired and Reason magazines and they bear out Davis's assessment. Even de Jager slams the apocalyptics in an article called Failure as Evidence of Effort. "These folks are not folks who have misread the news and incorrectly painted too bleak a future," he says. "These folks are using Y2K very cleverly and deliberately to create a state of panic".

As to the other apocalyptic pundits, Davis argues that there certainly are elements of profiteering and hucksterism, citing an article called The Millennium Bug and the New Industry of Hysteria by Michael Theroux of the Borderland Sciences Research Foundation.

Davis does not say much in response to Ed Yourdon, however. But electrical engineer Richard Mills does. He argues that Yourdon's chapter on potential failure of electricity generating plants is factually flawed. See his Comments on Time Bomb 2000. Mills's credentials are extensive and includes vast computer experience as well as electrical systems expertise. He is now a regular contributor to another Y2K website, Westergaard Year 2000.

David-Robert Loblaw, a systems analyst in Toronto with a large IT firm has put up a website called The Year 2000 Bug Computer Hoax. He links to many articles skeptical of Y2K. In fact, the MIS people and engineers where I work (a major television broadcaster) all think Y2K is overblown and not a big deal. At the Comdex show in Vancouver recently I did a straw poll and asked people whether they thought Y2K would result in major long term disruptions, major short term disruptions or minor disruptions. The results were 3, 3, and 12. Of the three forecasting major long term disruptions, two were selling Y2K remediation products, so you might say they had a vested interest.

Perhaps the last word should go Peter de Jager who started the Y2K ball rolling. De Jager thinks we are far from being ready for Y2K in an article in the January Vancouver Computes magazine. There are three main sectors that we should be concerned with. The financial sector, says de Jager, is ready. (Whew! Ain't that a relief!). The telecommunications sector is ready in that it will be able to provide service. They may have a problem with billing.

Utilities, however, are not ready according to de Jager. He says there is little likelihood of global power outages, however, local failures are likely. He suggests preparing for a four to six week disruption even though it may not happen in your area.

In the "Failure" article cited above,, de Jager notes that Y2K problems have already started developing. "The good news," he says, "which we hope will repeat itself time and time again, is that all the reported problems were fixed within a single day".

He believes that a stockpile of a month's supply of food is prudent, even without Y2K. "There are areas all over North America that are affected by hurricanes, earthquakes and floods, and people in these areas take reasonable precausions. I don't think the year 2000 problem demands from us anything more than that." Good advice.

Profiting from Y2K

One could, of course, profit from Y2K by joining the Y2K bandwagon and hustling all sorts of esoteric stuff such as Y2K Soap (a combination hand soap, shampoo, dish detergent and laundry detergent all in one. Rather like Amway's LOC!) or a Y2K Survival Kit (a gag gift item - check out this funny website), Y2K T-Shirts, beef jerky by the case, or the survivalist's favorite items after guns - the proverbial Grain Grinder and Bag of Wheat (the grain grinder in the picture looks amazingly like the one I bought in the late 70s after reading Howard Ruff).

But the smarter (and easier) way to profit from Y2K is to understand how it may affect your investments and plan accordingly. Currently many analysts think the stock markets are overvalued in the first place. Sometimes the markets just need an excuse to do a complete reversal. Y2K may afford such an excuse. Dr. Ed Yardeni, chief economist for Deutsche Bank Securities in New York, has an extensive website on what he believes will be the economic effects of Y2K. He estimates a 70% chance of recession.

Sunday I attended the 1999 Vancouver Investment Conference organized by Cambridge House International. One of the speakers was John Buckmeyer who spoke on Y2K. Buckmeyer does not buy into the doom and gloom scenario, nevertheless, he cited reports that estimate 15% of businesses will fail because they won't be Y2K ready. In his newsletter, The Millennium Advantage, he argues that a 36% - 75% decline in the markets is quite probable.

As an example of the seriousness of the situation he said Chevron had the most honest of the Y2K disclosure documents yet available. In it Chevron says it has identified 350 mission critical systems and 1200 third party relsationships that are mission critical. It is actively working at remediating them, but will not be able to get them all before year end and expects to continue remedial efforts into next year. While it believes any problems will be localized, it is unable to assess the probability of significant disruptions and "such interruptions could prevent the company from being able to manufacture and deliver refined products and chemicals products to customers".

Buckmeyer said we "don't need to fear Y2K so much as reaction to Y2K." He thinks mass psychology could play a more dangerous role in producing a market downturn than Y2K itself. His advice - get out of equities.

In his newsletter he lists two possible Y2K portfolios. One is 100% in money market instruments. The other is a mix of 60% money markets, 15% precious metals, 15% Y2K solution providers, and 10% speculative resource markets.

Buckmeyer also mentioned an American hedge fund that is investing in Y2K solution providers and will also short the market at the appropriate time. The fund is called Home State and can be reached by phoning 1-888-Y2K-FUND.

For me (since I like equity investing), the most interesting option is looking for companies that might profit from Y2K. Buckmeyer mentioned three - Cognicase, a Montreal based IT solutions provider and trading on the TSE as COG and on the NASDAQ as COGIF; LGS Group, a Montreal based IT and Management consulting firm trading on the MSE as LGS.A; and Group West Systems, an IT solutions provider based in Burnaby, B.C. with offices and affiliates in Ontario, Manitoba, Massachusetts and California. The company is traded on the VSE as GPW and has just been conditionally approved for listing on the TSE.

An extensive list of companies that stand to benefit from Y2K is listed on Peter de Jager's Year 2000 site. It includes many American companies and a number of Canadian ones as well. De Jager, in association with the American Stock Exchange, even created a Year 2000 Index which trades as YTK. Canadian stocks on de Jager's list include Cognicase, Cognos, Geac, Group West Systems, LGS Group, and Millennium Communications (MLU on the ASE). American companies include such well-known names as Bell Atlantic, Compaq/DEC, EMC, IBM, MCI Worldcom, NCR, Oracle, Peoplesoft, Sun Microsystems, Sybase, Symantec, and Wang. EMC has also been recommended by momentum analysts Carlton and Timothy Lutts of the Cabot Market Letter.

Buckmeyer also suggested that precious metals stocks would spike upward sharply if there is a general market decline. This was a view echoed by precious metals analysts at the Vancouver Conference. In fact, it was suggested by one that they would spike up much more quickly and much higher than they did last year when the market declined.

So there you have it. Food for thought, and maybe some profitable ideas.

Y2K is a touchy issue to many. Certainly the doomsayers love to denounce anyone who disagrees with them as ignorant Pollyannas, while the folks on the other side are quick to point out the element of hysteria to the doomsday scenario. What's your view?

 

Contents copyright Marco den Ouden       All Rights reserved
Typewriter graphic courtesy Stockfreeimages.com