By Bruce Dobie

NOVEMBER 3, 1997:  I took 24 hours of economics in college, and briefly thought of making it my major, but I have to say I never had a head for it. One day a teacher asked a simple question in class and left me humiliated. "If interest rates go up, what will bond prices do?" he asked. "They'll go up," I yelled out. Of course, I was wrong, but I hadn't just guessed wrong. I had thought about the question, but my answer was 180 degrees off the mark.

I just didn't get economics. Still don't. Nevertheless, I am proud that I began thinking this past Sunday that the stock market was going to plummet. It did. I also thought that it would continue to go down. It didn't. I'm normally an upbeat, optimistic person, but I am becoming a bear, not just about the market, but about most aspects of the economy.

The final nail in the coffin came this past weekend in a bar in Chattanooga. A friend had bought me some fancy-ass, single-malt scotch at $13.50 a shot, and I was also smoking an equally expensive Davidoff cigar. Everyone else in the bar was drinking the same hideously expensive liquor and smoking the same wildly overpriced cigars. Of course, it was a nice place to be. But it was a completely unreal place too. It could have been 1929, and I could have been Ernest Hemingway.

A whole world seems to be living beyond where it ought to be living, flying high in a stock market and in an economy that may be a total delusion. I have some firsthand experience with bad economies. I was in Louisiana for the collapse of the oil and gas industry in the early '80s, and I was in Nashville for the real estate and savings and loan free-fall in the early '90s. People weren't necessarily drinking expensive scotch and smoking fat cigars in either of those environments, but in Louisiana, they were using their private helicopters to fly to fast-food restaurants. In Nashville the lifestyles weren't so reckless, but people were continuing to sell real estate limited partnerships long past the point at which they made sense. Maybe they were having trouble making payments on their BMWs. Maybe they were doing too much coke.

Just before a fall, people begin to develop a false invincibility about the economy; in the process they jettison half their brains. Nothing can possibly go wrong, they think; everything has to go up. Paul Tillich, the theologian, once wrote that "doubt" is a necessary element of faith. In my view, the same applies to business. When any businessman stops having any doubts about his company, it's a good sign that the economy is in trouble. I honestly think that, in much of Nashville, doubt has disappeared.

Based on empirical evidence gained at cocktail parties during the last month, here are a few isolated examples of the over-heated economy.

Health Care

"We're going public in the fall of '98," an acquaintance says. He is buying up a bunch of physician's practices--doctors who do obstetrics and gynecology, let's say. Once he buys up enough of them, he's going to spring the new business onto the stock exchange.

Once the new company is on the stock exchange, its price will suddenly exceed what it might have been worth as a bunch of disparate enterprises. That's the magic of the stock market: If you go public, people are willing to buy shares in your company at a price that is much higher than they might have paid for companies that were owned by three or four doctors who simply liked doing medicine.

In Nashville a lot of folks are banking on this experiment in health care. These physician "roll-ups," as they are called, have been tested successfully on a couple of occasions, but many of them are still risky. A doubter would posit the notion that the entire scenario depends on the certainty that the new company will go public, an eventuality that nobody can guarantee. There is a promise of immense amounts of money to be made at a future date. Doctors leap in because they count the chickens. The eggs, however, have not yet been hatched.

This scenario is being repeated in many doctors' offices in Nashville. And goodness only knows how many people in the Nashville area now own millions of dollars worth of stock in health care companies. Their valuation on paper may only climb, but some of it still is risky paper. If a stock can go up amazingly fast, it can plummet too.

Real Estate

"We bid on a house within 12 hours after seeing it," I hear someone say. "We offered list price. Then someone came along and offered $10,000 more. We lost it."

This was the story six months ago, and it carried its own danger signals. People were going to irrational lengths to buy upper-end homes in Nashville. It was the sort of thing that points to a super-heated economy, one that is bound to come down, one that is unreal.

Things have since cooled. At present, the overall inventory of homes is higher than it has been for a year--13 percent higher than it was 12 months ago, according to one local broker. What this means is a classic "softening" in the market. If the additional supply is offset by an equal number of purchases, the economy will be shown to be strong. However, if this rise in inventory is not soon matched by higher sales, it will be a sign of weakness.

The bottom line either way is that the panic buying, a weird spectacle in and of itself, showed a disassociation from basic economic reality. People did crazy stuff. The next test will be to see if the real estate residential market stays strong--or if the floor falls out completely.

The Macro View

While the Chamber of Commerce is fond of pointing to the "diversity" of the Nashville economy, some experts disagree. Two weeks ago in The Wall Street Journal, some noted economists stated that, if signs of weakness are exacerbated in the automotive industry, Middle Tennessee is poised for problems. Nissan, in Smyrna, and Saturn, in Spring Hill, not only constitute a major manufacturing presence, but their largesse determines the fortunes of countless suppliers and distributors in the area. As they go, so goes the Middle Tennessee economy, suggested the Journal story.

Mark Vitner, economist for First Union Bank in Charlotte, says that according to his data, the economy here is slowing. Job growth in the Nashville area "has slowed quite a bit," and "unemployment has risen up a little bit too," Vitner says. He attributes those problems to the "flat" auto industry, and a slowdown in the health care industry. "For the entire 1990s, Nashville ranks as one of the fastest [growth areas] in the South, but over the last year, it has slipped considerably," he notes, adding that "the fastest growth is Orlando, Tampa, and Jacksonville. There's also Raleigh-Durham, Atlanta, and northern Virginia." He cautions that Nashville might be on the lookout for a slowdown in apartment construction, owing to "a little bit of overbuilding."

On a broader level, there are other problems. Because we have been a "hot" city in the past, we realize a multiple on our worth that is completely unrelated to our true value. Investment and capital improvements may have occurred here recently not because we really deserved them, but because people think we deserved them.

Did we really deserve professional football? Or professional hockey? Are these the kinds of businesses that can be absorbed by the city's consumers without doing damage to other businesses? Did these businesses locate here because of the impression that we were hot--or because we truly were so?

Like the market, these are questions without answers. But my guess is that finding the real answers will require a bit more skepticism, caution, and doubt.

Meanwhile, this market recommendation from someone who doesn't know much: Buy treasury bonds.