From his previous career as an investment strategist, your correspondent is accustomed to putting his neck on the line with market predictions and often as not having his head handed back to him. So here is the Monitor forecast for the Hang Seng Index next year. The starting point is not Hong Kong but the United States. It is so not only because we have a direct link to the United States in our currency peg and many indirect links besides, but because the US is just so big in financial markets that you cannot really talk markets in the world anywhere without talking markets in the US. Next year is the year the bubble in the US deflates. This has been a standard prediction of New Year forecasts for many years but your correspondent's excuse for offering it now is that this is the first time he has in fact done so. The reason it deflates, and take note here that the choice of word is 'deflates', not 'bursts', is that US interest rates have no way to go but up next year. They will do so first of all because every US inflation indicator bar the consumer price index (CPI) has shown a sharp swing upwards over the past year. Perhaps they have done so only because oil prices have shot up but that is a basic cost of living nonetheless. The pressure will inevitably hit the CPI soon and, given the Federal Reserve Board's obsession with the CPI, interest-rate increases will be pretty much automatic when it happens. They will go up secondly because a US current-account deficit running at US$30 billion a month is sustained only by matching inflows of foreign capital still happy to buy a Nasdaq market at 150 times earnings. If you think this can last any longer than a few months now then you probably believe in the tooth fairy too. When it all comes apart, Nasdaq share prices will go down, the foreign inflow will dry up and the US consumer will have to tighten his belt, which is defined in financial terms as paying yet higher interest rates. But it will deflate, not burst, because the US economy is still generally on a sound footing. This will be a correction of a pricing anomaly, not of massively misdirected economic effort as it was in Asia. Now take this to Hong Kong. First of all our interest rates will go up in tandem with US rates, which will slow us down; secondly the foreign trade we handle will be sluggish as US import demand declines, which will slow us down further; and then the euphoria in our own high-technology sector will evaporate. It will happen more severely yet in the rest of Asia bar Japan, which is another reason it will happen to us. The Asian financial crisis has given us proof enough that we cannot stay up when the rest of Asia comes down. So here is the forecast. The Hang Seng hits a new record of about 17,000 in the first quarter, declines to 12,000 by August (when has this market ever made small moves?), holds flat at that level until December, then jumps in a New Year rally and rises steadily through 2001 to 20,000. Why the optimism on 2001? Because we, just like the US, are on a generally sound economic footing. We have one bad patch to get through next year. Then interest rates will start to trickle down again and we will have a big, reasonably priced, under-supplied and over-demanded property sector that will constitute one of the world's best investment opportunities for the year.