Dot-com Bubble

10 Key excerpts on "Dot-com Bubble"

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  Boom and Bust

  A Global History of Financial Bubbles

  • William Quinn, John D. Turner(Authors)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  The spark for the bubble was provided by the realisation that network effects would vastly increase the usefulness of computer technology. The 1990s saw spectacular growth at existing firms such as Hewlett-Packard and Microsoft, providing early investors with enormous capital gains. The initial success of newcomers such as Netscape and AOL further demon- strated the potential profits that could be made from investing in dot-com firms. Partly due to the successful integration of information technology systems, there was a wider economic boom during the 1990s, and earnings were high even at non-technology firms. The resulting capital gains attracted speculative investors, whose demand drove prices ever higher. Prices might not have reached such a high level had these earnings not been accompanied by compelling ‘new era’ narratives about the transfor- mative power of the Internet. For the purposes of justifying dot-com price levels, these narratives consisted of two arguments: first, that the Internet was an incredibly significant and world-changing technology; second, that this made traditional metrics for valuing stocks irrelevant. The second argument was clearly much weaker, but the first argument was a much more interesting topic of conversation, and therefore formed the basis of most non-specialist discussion. As a result, one’s opinion on dot-com valuations was likely to be closely linked to one’s opinion on the potential of the Internet. Since people used the Internet increasingly often, its revolutionary potential was widely apparent, and the Internet itself was THE Dot-com Bubble 163 a powerful means of spreading the new era narrative. 50 In some cases, these theories encompassed broader sociological and political changes as well as technological ones.

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  The International Political Economy of Investment Bubbles

  • Paul Sheeran(Author)
  • 2017(Publication Date)
  • Taylor & Francis

    (Publisher)

  Whilst Japan's economy has continued to struggle with serious structural difficulties, relatively weak growth and output, and zero inflation, the Japanese economy remains important to the global economy. If it had ruptured to the degree to which some reports have claimed, international financial turbulence would be more apparent. The signs of a reversal in the region's economic fortunes are also noticeable in relatively strong fund performance. Whilst structural difficulties remain, many of the problems have been resolved or are being addressed.

  The Dotcoms Revolution: On-Line Manias and Discontents

  Although widely used, the exact meaning of the term dotcom is unclear. One requirement however is that a dotcom company must have an Internet address (it is, however, debatable if having a www address is enough to be a dotcom, hence some confusion). The dotcom would not exist, were it not for the Internet. The Internet and Internet-related technology stocks appeared in the 1990s and tumbled in 2000 and early 2001. During the rush to capitalise on dotcoms, venture capitalists and entrepreneurs courted each other in frenzied business relationships to push forward new companies towards initial public offerings. In complement, financial institutions offered favourable terms for investment in dotcom start-ups. This led to overvaluations and an expectation that prices would continue to rise indefinitely. The development in dotcoms cannot be studied without recognising the role of the telecoms industry, which was caught out by the high stock market in general and the inflated cost of the 3G licences. In the frenzy of the dotcom market, few were interested in fundamentals and the importance of related industries. The passage below illustrates a familiar pattern:

  in the post-bubble history of the tulip business may lurk some clues on the fate of the dotcoms, many of which have been liquidated, while others have seen their values fall by as much as 90%. After the bubble burst, the trade in bulbs did not disappear. Eventually, bulb growers learnt how to turn a profit again. They converted their business from a seasonal one to one that could produce all year round, something that e-tailers have still to learn. The fact that the business graveyard is overflowing with dotcom corpses tells us less about the future role of the internet in our economic lives than it does about the propensity of some to irrational exuberance.20

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  The Post 'Great Recession' US Economy

  Implications for Financial Markets and the Economy

  • P. Arestis, Kenneth A. Loparo, Elias Karakitsos(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The daydreamers thought that all this change would take place overnight. Dot companies mushroomed and their stock market value soared. Investors adopted the dream and priced such companies as if the dream had become a reality. Unfortunately, most dot companies were making losses, but they held the promise of making profits in the future. For as long as the corporate spending growth on equipment and software carried on increasing the promise of future profitability of internet companies was kept alive. But in March 2000 (after the 2000 computer debug was over) the corporate sector cut drastically its expenditure on equipment and software and with it was lost the dream that the dot companies would ever become profitable. The NASDAQ bubble had been pricked! The harsh reality is that every bubble follows the same pattern. The bubble is always created by an event that brings about a permanent change in future profitability. Every discovery that changed permanently future profitability resulted in a bubble. The bubble was always fuelled by credit that allowed the financing of the dream. But in every case the bubble burst because the discovery is not made in a vacuum. For the discovery to be fully exploited the overall economy needs time to adapt and the society’s habits need time to change. From this point of view the technology bubble is not different from the railway or canal bubble. The effects of the bursting of a bubble are also qualitatively the same. As asset prices (stock prices, property and land prices) fall the corporate and/or the personal sectors are left with huge debts that The Causes and Consequences of the Internet Bubble 31 must be serviced and ultimately repaid. These debts are accumulated when optimism is running high and asset prices are soaring, as in the NASDAQ case, and reflect the perception of the permanent improve- ment in corporate profitability.

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  The Post-Bubble US Economy

  Implications for Financial Markets and the Economy

  • P. Arestis, E. Karakitsos(Authors)
  • 2004(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The daydreamers thought that all this change would take place overnight. Internet companies mushroomed and their stock market value soared. Investors adopted the dream and priced such companies as if the dream had become a reality. Unfortunately, most internet companies were making losses, but they held the promise of making profits in the future. For as long as the corporate spending growth on equipment and software car- ried on increasing the promise of future profitability of internet companies was kept alive. But in March 2000 (after the 2000 computer debug was over) the corporate sector cut drastically its expenditure on equipment and soft- ware and with it was lost the dream that the internet companies would ever become profitable. The Nasdaq bubble had been pricked! The harsh reality is that every bubble is the same. The bubble is always created by an event that changes permanently future profitability. Every discovery that changed permanently future profitability resulted in a bubble. The bubble was always fuelled by credit that allowed the finance of the dream. But in every case the bubble burst because the discovery is not made in a vacuum. For the discovery to be fully exploited the overall economy needs time to adapt and the society’s habits need time to change. From this point of view the technology bubble is not different from the railway or canal bubble. The effects of the burst of a bubble are also qualitatively the same. As asset prices (stock prices, property and land prices) fall the corporate and/or the personal sector are left with huge debts that must be serviced and ultimately repaid. These debts are accumulated when optimism is running high and asset prices are soaring, as in the Nasdaq case, and reflect the perception of the permanent improvement in corporate profitability.

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  The Failure of Capitalist Production

  Underlying Causes of the Great Recession

  • Andrew Kliman(Author)
  • 2011(Publication Date)
  • Pluto Press

    (Publisher)

  3 Double, Double, Toil and Trouble: Dot-com Boom and Home-price Bubble At first, the recent financial crisis was widely characterized as a “subprime mortgage crisis.” 1 It is now generally recognized, however, that the increased rate of defaults on subprime loans was just one facet of a more general problem, the bursting of a home-price bubble in the U.S., and that this burst bubble was the main factor that triggered the crisis and Great Recession. The first two sections of this chapter briefly discuss why the bubble formed and why it burst, 2 and how this eventually led to the Panic of 2008. The final section then looks more closely at the role of Fed policy as a factor that contributed to the formation and persistence of the bubble. The so-called “dot-com” boom—the rapid rise in stock prices during the latter half of the 1990s that was fueled in part by the growth of the Internet and information technology—turned into a burst bubble in 2000. I shall argue that the Fed became gravely concerned that the U.S. might suffer a deflationary slump like the one that had recently led to Japan’s “lost decade,” 3 and that it responded to this threat with an exceptionally “easy-money” policy that helped fuel yet another bubble. This shows that the latest crisis was not merely a consequence of financial-sector problems that developed later in the decade. It was also a consequence of economic weakness in the U.S. that extends back much further. THE HOME-PRICE BUBBLE A steep rise in home mortgage borrowing, which led to a steep rise in home prices, began in the latter half of the 1990s (see Figure 3.1). 4 One reason borrowing may have begun to skyrocket was that the latter half of the 1990s was the period of the Dot-com Bubble. A lot of money was being made in the stock market, some of which was then invested in residential and commercial real estate. Another factor that may have stimulated mortgage borrowing was a change in income-tax law

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  The Energy World is Flat

  Opportunities from the End of Peak Oil

  • Daniel Lacalle, Diego Parrilla(Authors)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  The bubble path This flattening, or equalization, of the world happened in two phases. First was the “boom phase”, which took place during the 1990s, as a technological revolution led by internet, mobile, and broadband, had a major impact on productivity and growth expectations. Valuations were going up exponentially, based on growth expectations, not on profits. Traditional valuation meth-ods, such as PE ratios, were largely ignored. A venture capital mentality had developed, where the potential winners would more than offset the losers in the portfolio. The cash piling in was used to acquire smaller promising businesses, feeding into the frenzy. Everyone wanted to participate and large amounts of capital flowed into the new industry. Pretty much overnight, the world was “wired” with fibre optics. High return expecta-tions had attracted capital from other industries. A gradual build-up that might have taken decades, happened instead in a few years. The bubble had accelerated a process. Second, and equally importantly, was the “bust phase”. Valu-ations had gone too far, supply had increased beyond realistic expectations. Bad news for profits. Valuations collapsed and L ESSONS FROM THE I NTERNET R EVOLUTION AND THE D OTCOM B UBBLE 13 many companies went bankrupt. The “paper valuations” disap-peared, but the assets, such as fibre-optic wires, stayed. And thanks to the write-offs, they were now available at very low prices, pretty much free. The investor party was over, but the consumer party had only started. During the following decade, consumers were the main beneficiaries of the IT revolution. Outsourcing on a large scale became a reality. Our IT specialist was now able to sup-port clients in Los Angeles, with lower cost and faster turnaround. The world was becoming more equal. It was becoming flat-ter. For the first time in history, talent had become more impor-tant than geography.

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  The Boom and the Bubble

  The US in the World Economy

  • Robert Brenner(Author)
  • 2020(Publication Date)
  • Verso

    (Publisher)

  pp. 176–9 ). Belief in the unprecedented potential of the New Economy to increase productivity made for ever-increasing profit expectations, which drove share prices ever higher; the resulting increase of on-paper wealth allowed for record levels of household and corporate borrowing, leading to fast-rising rates of investment and consumption growth; high levels of investment brought about significantly improved productivity performance and helped to dampen inflation, appearing to justify confidence in the New Economy, and so forth. The glitch, of course, was to be found in the ever-increasing chasm that had opened up between expected profits, on the one hand, and actual profits, on the other, which manifested itself in the stock market bubble. Alan Greenspan displayed at all points a touching faith in the optimistic predictions of equity analysts, who accepted at face value the rosy reports they were receiving from corporate executives. But, as we know, from 1995–96, equity prices in both the New and Old Economies increasingly outran corporate profits and, in 1998 and 1999, as the bubble reached a fever pitch, profits in the non-financial corporate sector did not just lag behind share values, but fell significantly. During the first quarter of 2000, the high-tech/Internet bubble reached its apex as NASDAQ’s trailing (past year’s) price–earnings ratio reached the absurd figure of 400:1. This, however, was the end of the road: henceforth, the gap between profits and share prices could no longer be overlooked.

  The fall in equities: 2000–

  During spring 2000, one after another e-business ran out of money and collapsed, setting off the stock market decline, most of them never having made a penny of profits.7 During the following autumn and winter, almost all of the greatest names in the information technology sector, which had made the running throughout the length of the boom – not to mention the also-rans – were struck by an unending succession of increasingly distressing profit reports and saw the value of their shares whistle downwards, especially as investors gradually came to remember that the bottom line was still the bottom line.8

  There is strong reason to doubt, moreover, that, even at the time of writing, in mid-2001, the carnage is over, that the stock market has hit bottom. The fall in equity prices has naturally tended to push down hugely inflated price–earnings ratios to more realistic levels. But, because profits have also fallen so sharply, price–earnings ratios have not dropped as much as might have been expected, and, in general, remain far above historical norms. By mid-March 2001, the NASDAQ’s trailing price–earnings ratio had fallen to 154, from its level of 400 a year earlier, but it was still triple its average of 52 for 1985–2000. At the same time, the S&P 500’s price– earnings ratio was at 24, not that much below its level of 28.3 a year earlier when the bubble peaked, and far above its long-term average of around 15. It would seem that the depressive pressure on equity prices exerted by insufficient corporate profits still is very much at work.9

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  Hedgehogging

  • Barton Biggs(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER THIRTEEN

  The Internet Bubble

  I’d Still Rather Have Air- Conditioning

           

  This is a self-serving chapter about the tech bubble and me. I took a lot of grief in late 1999 and spring 2000 because I became bearish on technology stocks too early. In December 1999, I went to a 15% weighting in technology, which was then less than half of its weight in the S&P 500 and the EAFE index. This was a good move eventually, but not as technology stocks soared in the excitement about the Year 2000 effect and as the tech bubble got even bigger in the first six months of 2000.

  It was a very painful spring.You couldn’t be half the index weight in the biggest sector that was going up the fastest and expect to keep up with the indexes, much less the pack. Some of my clients became upset as their portfolios lagged, and I was subjected to considerable abuse. Some of it was well-meaning advice. A Japanese friend told me of an old and famous Japanese proverb about manias. It goes, “Only fools are dancing, but the bigger fools are watching.” Someone else unkindly quoted Nietzsche: “And those who were seen dancing were thought to be insane by those who could not hear the music.” Those pithy sayings made me feel like an idiot for not participating at the Great Tech Ball. The young, swaggering tech types at the office rolled their eyes.

  What really got me negative about tech back then was a gala conference I went to in late August 1999 in a fancy western town. The conference was sponsored by a prestigious Washington think tank, and the attendees were mostly the West Coast technology and Internet glitterati and other assorted elites. There also were a fair number of technology investment bankers present, and a famous professor from M.I.T. who had just written a best-selling book about the innovator’s dilemma.

  That summer, tech stocks were on a rocket trip to the moon, and the technology entrepreneurs at the conference were real dudes. Frank Quattrone and Mary Meeker were their heroes. Mary actually cautioned the crowd that things were getting crazy, but the herd thought she was kidding. As executives and entrepreneurs, they oozed optimism and confidence. Their chatter was all about sustaining and disruptive technologies, growth trajectories, Gulfstreams (it’s an airplane), and units. In case you don’t know, a unit is $100 million of net worth, so a guy would say, “Yeah, he’s worth five units.” One thing you could say for them was that they totally believed their own BS.

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  Diamonds Are Forever, Computers Are Not: Economic And Strategic Management In Computing Markets

  Economic and Strategic Management in Computing Markets

  • Shane Greenstein(Author)
  • 2004(Publication Date)
  • ICP

    (Publisher)

  It is part of an attempt to find a deeper explanation for what happened. This particular essay explores specific facets of business activity. } Chapter 21 125 22 An Inside Scoop on the High-Tech Stock Market Bust The market capitalization of many high-tech firms came down in a short period of time right around the turn of the millennium. There is no ques-tion that this was a shock to many people and disruptive to the economy as a whole. Stock options became worthless. Some investors lost a fortune in paper wealth. Other people lost their jobs. To be sure, some part of reevaluation of technology companies involved the absence of clothes on the dot-com emperor. Many did not want to admit their earlier, overoptimistic economic forecasts, and so did not recognize the beginning of the fall. Further, the events of 11 September made an already bad situation worse. That said, this event only provides part of the story; the reevaluation of high-tech firms started prior to September. The reevaluation also extended beyond new firms to the big leaders among them, such as Yahoo. Large established firms — Intel, Cisco Systems, Microsoft, Lucent Technologies, Sun Microsystems, IBM, and JDS Uniphase, for example — were also revalued. The decline in these widely held firms hurt many sophisticated investors. The recent unexpected crashes and large losses should not have hurt such smart money. These events illustrate some general principles about how to value ongoing, operating firms. To understand those principles, however, you need to address many simple myths about stock values. In particular, it is 126 Source: © 2003 IEEE. Reprinted, with permission, from IEEE Micro, January 2002. commonly stated that stocks were bid up by the Internet investment fad. That statement captures a grain of truth, but also begs a big question. Fads are social phenomena, affecting hula hoops and Beanie Babies.

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  Behavioural Finance

  • William Forbes(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Chapter 5 Bubbles The volatility of financial markets is both disruptive and costly. Episodes of speculative frenzy followed by market collapse seem the norm of our history. The advent of transformative new technology like the railways, or the Internet, often acts as the trigger to such episodes (see Miller 2003). The crashes of 1929, 1987 1 and most recently the Internet boom collapse of early 2000 are testimony to the ability of financial markets to destroy, as well as create, wealth. Speculative financial bubbles may be more than the illusion of paper wealth, which puff up then crush hopes of huge riches amongst the populace. De Bondt (2005) states: Asset market bubbles are worrisome because they misallocate scarce resources and because they lead to economic stagnation. Even if a bubble at first remains confined to one sector, contagion and spill-over effects can cause further damage. Bubbles also redistribute wealth. Sometimes good people get hurt. Financial earthquakes undermine the public’s trust in the integrity of the financial system. This erosion of trust is most probably well placed given the range of dubious dealings associated with sharp rises in the stock market. This creates possible grounds for public policy intervention to prevent the worst excesses of bubbles. Robert Shiller in his commentary of the most recent bubble argues, It is a serious mistake for public figures to acquiesce in the ups and downs of market valuations, to remain silent about the implications of valuations and leave all commentary to market analysts who specialize in the nearly impossible task of forecasting the market over the short term and who may share interests with investment banks, broker-dealers, home-builders or realtors. The valuation of our markets is an important national – indeed international – issue (Shiller 2005, p.208). One legitimate ground for government intervention is public fear (Sunstein 2005).

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