Friday August 3 10:16 AM ET

Bank: Tuesday US Data Could Spark Selloff

LONDON (Reuters) - U.S. productivity data due out on Tuesday could shatter the belief in a ``new paradigm'' economy of high growth and low inflation, triggering a stock market crash, a leading investment bank has predicted.

Dresdner Kleinwort Wasserstein said in a note to clients that revisions included with second quarter productivity numbers will revise away the ``productivity miracle'' of recent years, cited has a major factor in the bull market of the 1990's.

``Investing in the U.S. miracle will in retrospect be seen as a sick joke. The markets will be forced to confront this harsh reality on August 7,'' DrKW Global Equity Strategist Albert Edwards wrote.

``Make a date in your diary! The U.S. 'new paradigm' will then be officially revised away! The risks of an equity crash are high.''

Edwards could not be reached to comment on how quickly this crash might happen.

The term ``new paradigm'' arose to explain the fact that strong U.S. economic growth during the 1990's failed to trigger inflation. Many economists credited a rise in productivity, caused by technology, which allowed businesses to produce more without raising costs.

This helped drive up stock markets because investors believed corporate profits could now grow at a faster pace than in the past.

But Edwards predicted revisions included in the second quarter productivity data will knock a full percentage point off longer-term estimates of productivity growth. He said trend productivity growth could be closer to 1.5 percent than the 2.5 percent many now predict.

Because earnings estimates are based on a 2.5 percent rate, Edwards said the equity market is vulnerable.

As a result, the firm's recommended equity portfolio is underweight equities and overweight bonds and cash.

DrKW's model portfolio recommends placing 40 percent in equities, 45 percent in bonds and 15 percent in cash

http://dailynews.yahoo.com/h/nm/20010803/bs/markets_crash_dresdner_dc_2.html

-- Martin Thompson (mthom1927@aol.com), August 03, 2001

Answers

I've been reading about, and impressed by, the big U.S. productivity gains of the past several years, and must admit, I was totally fooled by it, thinking it, alone, was the key to the Pearly Gates.

It will be most interesting to see what, if anything, comes to pass next Tuesday.

-- Billiver (billilver@aol.com), August 03, 2001.

This has fooled no lesser a guru than Alan Greenspan, too. In many speeches over the last five years he has mentioned it as the great savior and blunter of the economic cycle of boom or bust.

-- Billiver (billiver@aol.com), August 03, 2001.

Who is Wasserstein anyway? I've never heard of him. Does he carry any credibility at all?

-- QMan (qman@c-zone.net), August 03, 2001.

I guess we will all find out, come next Tuesday.

I am going to a Tommy Dorsey band show, fronted by Buddy 'Night Train' Morrow. Now doesn't that hark back to a couple of lifetimes ago? I hope the day's results will not spoil my expensive dinner out.

-- Big Cheese (bigcheese@mutimax.net), August 03, 2001.

Looks like Mr. Edwards has to look at the harsh reality of making off the wall predictions. Seems like just another HO HUM day at the market.

NEW YORK (AP) - Wall Street traded tentatively Tuesday, with investors bidding blue chips moderately higher but selling technology issues on another string of semiconductor downgrades.

Analysts say caution, evidenced by light volume and a narrow trading range, will continue to rule the stock market until companies can tell investors what they want to hear: Business is getting better.

-- Martin Thompson (mthom1927@aol.com), August 07, 2001.