January 14, 2000: A Date to Remember

August 23, 2011

January 14, 2000 is a well-suited statistical benchmark for assessing the U.S. economy.  If February 3, 1959 was the day the music died as immortalized in Don McLean’s ballad American Pie, calling January 14, 2000 the day the American economy died is only a slight overstatement because the before-and-after performances around that milestone are so different.  That date, some two weeks after the Y2K scare and still twenty months before the Al Qaeda attacks on the World Trade Center and Pentagon complex, marked the peak of a nearly two-decade bull run in the Dow Jones Industrials, which closed at 11,723, or 15,532 adjusted for subsequent CPI inflation.  In January 2000 dollars, the DOW is now 29.2% weaker than then, a 2.9% per annum erosion in real value.  The S&P 500 index over the same span has dropped 41.1% in inflation-adjusted terms, an annualized fall of 4.5%. 

When it peaked in January 2000, by comparison, the DOW was showing a nominal annualized gain of 16.9% from lows of 777 in August 1982 as well as 1738 in October 1987. 

Gold, a symbol of confidence in the U.S. economy and currency, was fixed at $282.20 on January 14, 2000.  Adjusted for subsequent inflation, $282.20 then is like $375.30 per ounce now.  On such a basis, gold’s dollar value adjusted for U.S. inflation has roughly quadrupled and risen 14.9% per year over the intervening 11.5 years.

The dollar since January 14, 2000 has depreciated against other paper currencies.  It was then trading at $1.0178 per euro and JPY 106.07.  It has lost a cumulative 29.4% against the euro and 27.8% against the yen.  In annualized terms, that erosion equates to 3.0% and 2.8%, respectively.

The shrinking dollar didn’t occur in a vacuum, but the cause was not the usual suspect of accelerating inflation.  On the contrary, consumer prices had advanced 4.0% per annum in the half century between January 1950 and January 2000 but at a lower 2.6% over the past eleven and a half years.  That improvement, moreover, wasn’t large enough to explain the declines in the 30- and 10-year Treasury yield of 318 basis points and 452 basis points since January 14, 2000.  Those steep declines are all the more startling given that the Federal government was running a deficit in 2000 but reverted shortly afterward to chronically massive deficits.

The main problem has rather been a rapid slowdown in the growth of jobs, real economic activity, and nominal GDP.  These developments weren’t predicted by conventional wisdom then and do not justify the current restrictive direction of fiscal policy.  Considerably faster growth in labor productivity that emerged in the 1990s and downwardly trending inflation gave vent to optimism among economists as the new century started.  The table below contrasts per annum growth in U.S. real GDP, nominal GDP and jobs over the fifty years prior to January 14, 2000 with their trends afterwards. 

% Per Annum Prior Fifty Years Since January 2000
  Real GDP 3.6% 1.6%
  Nominal GDP 7.4% 4.0%
  Jobs 2.2% 0.05%

Fans of market capitalism will probably say that the DOW’s difficulties after 1999 exemplify the collective wisdom of all investors in the marketplace, who understood in a period of budgetary surplus, extraordinary technological advances, and more stable prices that something very bad was about to happen.  Others would characterize the turning point on January 14, 2000 as a piece of lucky foresight. Whatever one concludes, the before-and-after contrast surrounding January 2000 unquestionably should have marked a major turning point in the market, and it did.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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