CAVEAT EMPTOR Craig Harris Harris Capital Management, Inc. CTA May 16, 2002 In the past few days I've forwarded a lot of articles to my clients and newsletter subscribers that were based on things I've said would happen... which are now happening. It's strange for me because I'm really a pretty conservative, skeptical person. I never believed in crop circles, and I've always felt like conspiracy theories were for the Jerry Springer guests. As I'm writing some of this stuff lately however, I feel like some sort of fringe lunatic but on the other hand, the current facts keep supporting my "outlandish" past assertions regarding the future. Here are a few of my predictions that have already come true: -the equity market was in a mania and the the bubble would burst resulting in a multi year bear market, one of the worst in history here's one of my many quotes, from the newsletter dated 03/01/1998 "Shame, shame. My favorite "Beardstown Ladies" have apparently been doing some cooking (on their books that is). I thought the skeletons weren't supposed to come out of the closet until the bear market started???<g> I would like to point out that EVERY person I know is fully invested in stocks and merrily calculating how much money they're going to have 10 or 20 years from now. This market is a big accident waiting to happen. Maybe those demographic people are right... maybe it's not going to end until after 2000... when it does end... there will be widespread misery for all." I was dead right on this bear market... a little early, but dead on right. -terrorists will attack the US quote from my Newsletter dated 12/20/1998 "If some of these american hating arab countries get hold of those one hundred thirty something missing russian built tactical (backpack) nuclear devices for example, we could be facing a new sort of war... terrorism on a nuclear scale. I believe that unfortunately, ultimately this is probably going to become a reality. The more governments and people that oppose what they are seeing in terms of US behavior, the higher the probability of this sort of thing in my opinion. A nuclear device going off would almost surely cause a serious problem in the financial markets, or what's left of them seeing that one of the most likely terrorist targets in the US would be the south end of manhattan." So, I had the attacking region right, I had the location right, I had reason right, I had the outcome right, I was a little off on the method, but not by much... and the prediction came nearly 3 years ahead of time. -personal debt and bankruptcies will skyrocket from 05/07/2002 "Over the long term, you have to expect that housing prices will roughly equal the new construction cost, with the exception that in areas where there is no available land you have to add back the cost to purchase and demolish the existing structure... which is something that happens a lot here in South Florida where certain real estate is all "used up". The big question is, where do real estate prices go from here? I keep thinking that prices will collapse within one or two years, once the bear market is fully ingrained and after more eco-political bad news. I think many people that are stretched now are going to find themselves unable to make their payments and I'm also looking for some of those ominous personal debt numbers to increase personal bankruptcies to all time highs.The people that are grossly overpaying are likely to add fuel to the personal bankruptcy problem. this has already happened in California before. When you pay 500,000 for a house that's now worth 300,000. Well, you have a problem if you need to sell it. In many cases people are forced to just walk away and let the bank take the loss." -the equity market has seen and will see direct intervention by the FED from 08/27/1998 "This concern is spilling over now heavily into the US equity market. In germany they were off sharply as there are several german banks with heavy derivative exposure to Russia. The US FED was in the market buying australian dollars as their currency was making new lows. We ended the day at the lows on Thurs off 357 points on the Dow and that's likely to spur more contagion overnight in Asia. Anytime there are huge moves in these modern times, you have to be concerned about derivative exposure and counter-party risk. The losses in Russia are still coming out of the closet and some of them are huge. If the US markets start moving wildly, that's something to be seriously concerned about. If we are sharply lower in the US equity market Friday I suspect that the cash/futures premium will mysteriously widen as the FED "crash protection team" works their magic." -Enron's problems were worse than people suspected From the newsletter 11/26/2001 This is a major issue for investors who actually care about the fundamentals... I know that seems to be the minority these days... the reality is that it can often be difficult or impossible to tell the real value of the company you are investing in. They mentioned Enron in the article... that has been getting an awful lot of press lately and bringing this issue to the forefront. There is speculation that the Enron disaster is worse than people know about and is intertwined with big derivative positions and banking relationships. -There will be many more "Enrons" in 2002 from 12/09/2001 "Does anyone know (using hindsight) what the first shoe to drop was for Enron? When a CEO leaves an apparently profitable company for "personal reasons", it's a big blinking red flag. Did anyone notice Jerry Levin announcing his departure from AOL Time Warner last week? Is this going to be another pro forma accounting scandal? Maybe... but as I was saying last week, I don't think Enron was the only company out there where all appears rosy but the reality is otherwise... I think pro forma numbers are going to haunt a lot of other companies." -The price of gold is being manipulated from the newsletter 11/19/2000 "Gold continues to do nothing. GATA and the conspiracy theorists continue to do a lot of work to get some visibility to what's going on in the gold market, but I'm thinking that in order to pop the lid off the market, there's going to have to be one or more big leveraged buyers getting long, like the largest hedge funds. I have to think that the reason it hasn't happened is that no one feels big enough to be up to it. I still like it as a hedge because it is artificially cheap." from the newsletter dated 12/17/2000 "GATA continues to get more press. While I certainly don't know whether or not they will succeed with their lawsuit, they are generating a lot of publicity. There are a lot of people that are coming around and accepting that the gold market may be being manipulated. I think that these are positive developments for the gold market, but I'm not sure that we have anything substantial enough yet to cause a big price increase." from the newsletter dated 1/30/2001 "Gold was up on the day, reportedly ahead of the expected decision by the FED to cut interest rates. GATA is getting more press... the next key date for them is March 15. This is when "the players", such as JP Morgan and Goldman Sachs, will appear in the Massachusetts District Court to respond to the GATA complaint. If the judge admits the action, even Greenspan will appear under oath answering evidence supplied by Gata of a sprawling, four-year long manipulation of the gold price. The thing is though, if there really is a manipulation going on (and I think there is), there's certainly enough at stake for some "friends of Greenspan" to... well let's just say "guide the legal process". So, some of these sounded pretty outlandish when I said them but all of the above statements have now been proven true. I guess the bottom line is that we're living in such a "whacky" (for lack of a better word) environment of smoke, mirrors and lies that the outlandish is becoming more the norm. The only thing you can count on is that what is being espoused as the truth, is not the truth but some combination of smoke and spin. I mean think about it... A year ago if you had todays news you'd be saying, this might make good fiction but it's way too extreme to be believable. Now, after 911, Anthrax, Enron, Afghanistan, the Mid East we are becoming habituated to these extreme events along with the accompanying denials, lies, cover ups and just regular old spin. Unfortunately for us all, the truth is extremely out of vogue. I guess maybe it's time for another outlandish prediction. If we have a west vs Mideast war, the G7 will lose control of the gold market, and we will have a global currency crisis the likes of which the world has never seen. After a period of hyperinflation in the US, we will have a long global depression. I'm estimating that the probability of a nuclear west vs Mid East exchange at greater than 50% in the next two years, so in line with that, I believe this scenario has greater than a 50% likelihood of occurring. Ok, you say... that's certainly outlandish, but outlandish predictions require substantiation... so why? I think you are all relatively informed of why I think there will be war... I've discussed that part at length on many occasions over the past several months. But why would that cause the g7 to lose control of the gold price, and then why prey tell would we have a currency crisis? I'd have to answer that by saying that right now, the US financial system has serious deep rooted problems that are being artificially masked and minimized by a very powerful group of central bankers. As revealed in O'Neill's memo, even in 2001, the US had a deficit of over 500 billion on a net income of "only" 2.1 trillion. As I'm writing this, that deficit number is expanding rapidly, along with a hemorrhage of US dollars in the form of an unsustainably large trade deficit. My point is however, would you loan money to someone with a balance sheet like this? No way... because there's no way someone in this precarious situation would ever be likely to pay you back. In the case of the US government however, sure they'll pay you back, but with what? With pieces of paper that have pictures of Presidents on them. The only reason the currency hasn't collapsed already is because there's no viable alternative for it to collapse against... thanks to an artificially engineered environment by our friends at the g7. My thesis however is that the panic caused by a "real" war would be more than sufficient to tax these already strained financial engineering resources and cause a significant loss of confidence, and remember as I've stated many times, this shell game is all based on confidence. When confidence is gone, assets will seek their intrinsic value. In the case of the USD, it will seek its intrinsic value, which will probably be near zero. Investors in their panic to seek something "real" will drive up the price of gold and hard assets as the price of dollar denominated financial assets will plummet. This is hyperinflation. We've seen it happen in other countries and I assure you it can also happen to the US. After that happens and the g7 bankers deal with an Argentina style crisis (which could take years), the global economy will be in dire straits. The wealth gap between the rich and poor countries will narrow, and we will start all over with an asset backed currency system, and a much more equal distribution of wealth across the globe. -CAVEAT EMPTOR- May 16, 2002 Craig Harris President Harris Capital Management, Inc. CTA http://www.harriscapitalmanagement.com bcharris@gate.net Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. 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