Wall Street's Humbling Year

The Daily Reckoning

final Weekend Edition in 2000

December 30-31, 2000

Waterloo, New Hampshire

By Addison Wiggin

MARKET REVIEW: Wall Street’s Humbling Year: Where’s Abby C. When You Need Her?

Stocks dropped across the board Friday during the final session of 2000… helping Wall Street put the lid on a most humbling year. In fact, Friday’s selling left the tech-weary Nasdaq with its worst one-year loss in that market’s history. Losses for the year also left the Dow nursing its first year-end negative since 1990. The Dow fell 81 to end the week, the month, the year… the century and the millenium… at 10,786.

For the year, the Dow finished 6.2% – or nearly 1000 points – below highs reached very early in the year. On January 14th the Dow peaked at 11,722.

The Nasdaq enjoyed losses totalling nearly 40% in 2000… almost 5% greater losses than the previous record of -35% set back in 1974 – following the collapse of Wall Street’s last great tech bubble. Following Friday’s drop of 87 (to 2470), the Nasdaq will kick off the new millenium more than 50% below its March 10, 2000 close of 5048.

The S&P 500 also fell on Friday closing out the day 13 points lowere at 1320. Despite Abby Cohen’s fondest hopes for a +15% year-end finish, the S&P finished down… -10% for the year.

But bulls are not discouraged. Analysts are hopeful that the market will benefit greatly from the “January effect” – when “profits” from year-end tax selling and holiday bonuses get dumped back into stocks.

Markets around the world: Tokyo’s Nikkei dropped 1.16%, the DAX in Germany rose 0.97%, Britain’s FT-SE slipped a skosch 0.01%.

The Russell 2000 index of “smaller companies” dropped 10 to finish the week at 483. The Wilshire 5000 closed out the year 12,175.


Gold: $272

Crude Oil: $26.80

Natural Gas: $9.77 (We hit this one on the head!)

CRB Index: 227

Dollar Index: 109

Esperanto zeuro: .94

British Pound: 1.49

Japanese Yen $.88

FLOTSAM AND JETSAM: The Inverted Yield Curve Takes No Prisoners

– from Gary North’s Remnant Review:

“…George W. Bush is now walking straight into a financial disaster that is not of his own making So are all the rest of us. It will be called the “Bush II Recession.” It will be a replay of his father’s first (and last) term . . . only worse. There is one major factor that points to a recession in 2001. The press is not talking about it. But you need to know about it before the crisis hits. It has hit the dotcoms already, but this is only the beginning. The worst is yet to come.

The boom-popping needle has appeared. First, it took down the tech stocks because what the needle eventually does to the general economic boom, it does first to the stock market.

Bush is going to get blamed for this. The last recession in the United States, which began in 1990, was triggered by this very same needle, which appeared in 1989. It won’t be Bush’s fault, but politics is merciless. The recession has been programmed. It will pop the financial bubble. What is this boom-popping needle? It’s called the inverted yield curve. It is by far the most reliable predictor of economic recession. But the vast majority of investors don’t take it seriously. Let me show you what I mean…

A yield curve is a graph that compares interest rates on debt instruments of varying maturity dates: short to long. If you were to graph the interest rates paid for each maturity period, the graph would normally slope upward and to the right. The left-hand side of the graph (short-term rates) is lower than the right-hand side (long-term rates). This is a normal shaped curve for the interest-rate yield at each maturity.

Under very rare economic conditions, borrowers pay a lower rate of interest for long-term loans than for short-term loans. This condition produces a peculiar graph: the left- hand side of the graph (short term) is higher the right-hand side (longer term). This is why economists call it inverted.

Today, the entire yield curve is inverted. It is the most grotesquely lopsided yield curve that I have seen in over 20 years. It is unprecedented.

My forecast is that the Treasury yield curve will become fully inverted in August 2001. If that comes true then you can be nearly certain that just as night follows day and day follows night, the next recession will arrive in 2002.

How accurate has this indicator been in the past? It is the most accurate recession-forecasting indicator there is. Professor James F. Smith of the University of North Carolina’s Kenan-Flagler Business School states:

“Whenever you see this relatively rare phenomenon, which was last seen in 1989, and it persists for one month or longer, you can be virtually certain that the next recession will occur within 10-15 months.”

Why should it be such a great forecasting tool? Here are some situations in which an inverted yield appears:

Deflation is thought to lie ahead and prices are expected to fall.

Investors fear a lengthy stock market decline.

Businessmen get trapped by a looming recession at the tail end of building projects.

The Federal Reserve System has tightened money. This will push price inflation down, but it also increases the risk of a recession.

In a recession, businesses will be trapped in scenario #3.

Most investors refuse to see what’s coming. They are optimistic beyond reason. But the wise ones know better than to believe the hype. The Nasdaq has suffered major losses and we are now seeing the results of high-risk projects (the Internet bubble), low-risk investing (buying in a market that will not be allowed to fall), and historically unprecedented stock market returns (19% per annum compounded, 1981-99). When investors at last lose confidence in the ability of their portfolio to perform, they will search for more conventional returns. Here was my advice in February 2000:

Irrespective of all other explanations, we are coming to the end of the Clinton-era boom. We may be coming to the end of the Greenspan-era boom (1987 to the present). We may even be coming to the end of the Reagan marginal rates tax-cut boom (1982-present).

I warn you: the inverted yield curve takes no prisoners.”

Impressive work.

Have a happy 2001,

Addison Wiggin,

The Daily Reckoning

P.S. If you want to see more on Gary’s analysis of what could derail the economy click here:

The New Economy, Derailing

The Daily Reckoning