John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website DollarCollapse.com in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.
After World War II, the US and its allies were worried about staying in touch during a nuclear war. So they (I’m vastly over-simplifying here) created networking protocols and tools that eventually became the Internet.
At first, these links were limited to scientists and the military. But as the tech was refined, it became clear that instantaneous access to pretty much everything created opportunities beyond fortified bunkers sharing battlefield data. And with the 1994 release of Netscape, the first modern web browser, Wall Street was captured by the idea that the Internet would change the world.
Hot money poured into what was at first a tiny niche, and anything related to the revolution was swept up in the tide. “Dot-coms” went public as fast as investment bankers could print the offering documents, and a massive speculative party ensued. The resulting capital gains tax revenue even allowed the US government to run surpluses for a couple of years.
The Dot-Com Bubble refers to a period of excessive speculation and rapid growth in the stock prices of internet-based companies during the late 1990s and early 2000s, which ultimately led to a market crash. Here’s an overview of the key points:
1. The Rise (Mid-1990s – 2000):
Internet boom: The dot-com bubble began as the internet started to gain widespread popularity in the mid-1990s. Companies that had “dot-com” in their names, signifying they were part of the emerging internet economy, became highly attractive to investors.
Venture capital: A surge in venture capital funding supported the creation and expansion of new tech startups, many of which were unprofitable but had optimistic growth projections. Investors were eager to capitalize on the potential of the internet to revolutionize business.
Stock market speculation: As a result, many internet companies went public through Initial Public Offerings (IPOs), even without solid business models. Companies like Amazon, eBay, and Yahoo! became famous during this time.
2. Speculative Mania:
Unrealistic valuations: Internet stocks were often priced at unsustainable levels, driven more by speculative enthusiasm than by actual financial performance. Investors were betting on future growth without regard for current profitability.
Media and hype: The media amplified the excitement surrounding the “New Economy,” contributing to a sense of euphoria and fueling demand for tech stocks.
IPO Frenzy: Companies with little more than a website would go public and immediately see their stock prices surge. This created an environment where the promise of future success seemed to justify even sky-high stock valuations.
(Me again) By decade’s end the frenzy had reached Dutch tulip mania proportions. The NASDAQ index — home of the dot-coms — had risen by 1000% in ten years. And the world was in a tricky spot, with the global economy depending on the US economy, which depended on the US stock market, which depended on a handful of mega-cap tech stocks that in the aggregate had zero earnings.
Now back to Chat GPT:
3. The Crash (2000-2002):
Signs of trouble: As 2000 approached, some investors began to realize that many of the dot-com companies were failing to turn profits, and the hype surrounding them wasn’t sustainable.
Bursting of the bubble: In March 2000, the NASDAQ Composite, heavily weighted with tech stocks, peaked, and after that, it began to decline rapidly. Many internet companies, unable to meet investor expectations, saw their stock prices plummet.
Bankruptcies and losses: By 2001, numerous dot-com companies had gone bankrupt or were forced to shut down due to unsustainable business models. Others saw their stock prices fall by 90% or more.
Today’s Bubble Dwarfs the Dot-Coms
Conceptually, we’re back in 2000, with the US and (potentially) the global financial system depending on a handful of tech companies with ludicrously rich valuations. Today’s dot-coms are of course the AI stocks (formerly known as the Magnificent 7), which account for most of the recent gains in the NASDAQ and S&P 500 — and which depend for their value on not just AI in general but their particular version of it.
For perspective, let’s use the Buffett Indicator, which compares the market caps of all outstanding equities to US GDP. Note that it was high in the 1990s, but is way higher today.
To sum up, today’s bubble definitely rhymes with the dot-coms. If the inevitable bust also rhymes, look out below. In the meantime, we might want to buy some put options for insurance.
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