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. PRICES FOR THE WEEK:
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
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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 | 
