A follow-up to the Clinton Collapse of 2000

Despite its prevalence in the news and in the Obama campaign that Bush inherited a great economy in 2001 and ruined it, the events of the time were very different. When I first saw this fallacy repeated, I thought “The economists will set the reporter straight.” No — everyone the media was willing to talk about jumped on this bandwagon, and it is part of the narrative that Obama relied upon in 2008, and must keep you convinced of today.

A bit of background:  I mentioned earlier the entry of everyday people into the stock market. In the early 1990s, relatively few people actively traded in the markets.  Many folks who had some money used mutual funds, the more adventurous ones used brokers, but not many actually did stock or commodities trading directly. (By this point, it had been an interest of mine for two decades.)  To get live feeds from the markets, essential for someone actively trading during the day, you used satellite feeds or (years later) FM-signal sidebands which were essentially receive-only radio modems.  You bought historical data on disk, and it cost thousands of dollars. For example, in the mid 1980s, we bought price-by-price data for several years of S&P and Japanese Yen for $20,000.

The Internet changed all this.  You could get historical data over the Internet — some even for free.  And you could get live data over the Internet as well.  No satellite dish, no limitation of being close to certain FM stations, and a greatly reduced entry cost.

People started trading.  And talking about it, so that others got involved too.  This concept spread rapidly, and of course the stocks that these computer-savvy folks liked were computer stocks.  The Dot Com Boom was under way.  And except for the Crash of 1998 — a phrase that might be new to you — it continued for years.

The NASDAQ is the home, generally speaking, of stocks of technology companies.  As a result, it lead the way in this peculiar stock bubble.  But the new hordes of investors and day traders were willing to invest in anything. The entire economy was buoyed up by this enthusiasm, and venture capital would jump into any plan scratched out on a paper napkin.  “Profits?  Nah; just an idea.  People will buy it!”

They did.

In late 1999, a few guys with a couple of grocery delivery trucks in San Francisco figured out the best way to capitalize on this.  They hired the best brokers (Goldman Sachs), brought on board some Big Name People for the right “cachet” of success (including Louis Borders of then-successful Borders Bookstores), spent two million dollars on lawyers, and did an initial public offering or IPO in December.  The actual intrinsic value of the company, minus these promotional effects, was perhaps a hundred thousand dollars.  If it was even positive; the little grocery delivery company had never made money and didn’t expect to, and their business plan called for them to lose money for years.  I was amazed at their prospectus (hundred of pages!) and the hype being generated by Goldman Sachs over this silly little company.

They sold less than 9% of their stock for four hundred million dollars.  WebVan was born at the end of 1999.  And in a sense, WebVan killed the market.  There was a feeling among certain savvy investors that “enough is enough” — and with this bit of backlash, the DOW fell back from its peak in January.

My friend Digital Knight commented about the Y2K scare — and it was a Big Thing, convincing catastrophists (and those susceptible to them) that great trauma was in store on January 1, 2000.  People moved out into the wilderness with supplies of goods, leaving the “doomed” civilization behind. There was a huge population of old programmers — like me, in fact — who were sought after to fix companies’ Y2K date issues in old COBOL code.  (My own company continued to build new business software; even our decades-old code was always Y2K compliant.)

But January 1, 2000 came and went, and nothing of significance happened.  The news media tried to make big news out of the fact that nothing newsworthy occurred, but this didn’t last long in the euphoria of the Dot Com Boom. The problem was not Y2K, it was the ridiculous oversupply of hype from the IPOs like WebVan and the industry that had accreted around it. By March 2000 people were actively talking about the end of the Dot Com Era, and the days of “Zero Gravity Venture Capital.”  March 2000 was the highest month of volume in the US stock market’s history — and was not equaled for several years.

The tide had turned, in a way highly visible to those involved in the markets — but the general public hadn’t realized it yet.

Here’s a typical scene from the following month.  April 15, 2000:  A company wide gathering at a substantial software company in Orange County California — they were burning through more than a million dollars a month, but were close to releasing their product.  On that day, the entire crowd awaited the arrival of their major backer, who was scheduled to present a check for $15 million to keep them alive.  But, on the way over, this backer listened to the financial news — and got scared.  He announced to the crowd that he was not able to give them the check. The stunned employees and executives had been all but pole-axed, and they wandered off wondering what was coming. Weeks later, the company was gone.

Playboy postponed their IPO of “Playboy.com” — and weeks later canceled it entirely.  The rest of the year was characterized by the crash in NASDAQ and elsewhere that you saw on the charts from earlier today.  And, by the news media almost completely failing to mention the economic crisis — as they wanted their boy Al Gore to continue the Wonderful Clinton Economy.  This was despite the fact that the NASDAQ lost more than half of its inflated value between March and December 2000.

By September the tech stock crash was bleeding badly into the rest of the market.  September 2000 was the peak of the Dow Jones Industrial Average, and we didn’t see that level again for years. We’re just barely above it now.  A brief rally in April 2000 failed, and the DOW ended lower than it began that month.

In the meantime, the Federal Government, giddy with the massively increasing revenue, were ramping up spending at a rate not seen for most of a century.  And when they saw what was happening in late 2000, they realized three things:
—  First, they needed a Democrat in office to keep this spending spigot open, and
—  Second, they needed to keep the positive news going about the economy — or they’d be reined in.
— Third, Bush’s proposal of a tax cut to save the falling economy had to be discredited.

So, the Clinton Economy was Still Wonderful. And no one — not Republicans, and not Democrats — was willing to actually mention this impending and accelerating collapse, though Bush’s tax cuts were clearly aimed at it.

By the end of 2000 — not only before Bush took office, but before the election was really resolved — the DOW was already down 6% for the year, and the NASDAQ about 40% and falling.  Here’s a recap:

Treasury           12/31/99      12/29/00       %Chg
30-year Bond         6.48%        5.45%        -1.03%
10-year Note         6.44%        5.11%        -1.33%
5-year Note          6.28%        4.98%        -1.30%
2-year Note          6.18%        5.09%        -1.09%
Fed Rate Target      5.50%        6.50%         1.00%

Stock Prices
DJIA                11497        10789          -6.2%
S&P 500              1469         1321         -10.1%
NASDAQ Comp.         4069         2471         -39.3%
Russell 2000          505          484          -4.2%
Wilshire 5000       13813        12178         -11.8%

So with all of this — which I was tracking intently at the time — the idea that “the bad times started in Bush’s term” is puzzling to me.  Of course, the 9/11 attacks made things much worse, but even that didn’t keep the tax cuts from making the Economic Collapse of 2000 an extremely short recession.

As opposed to now, when the recession has been dragged out for years by government policy, in the manner of FDR’s Great and Near-Permanent Depression.

There ARE serious problems — but they are misunderstood.  ];-)

===|==============/ Keith DeHavelle