Video: Dot.com boom’s “New Economy” that never was

Reminiscent of American economist Irving Fisher’s infamous call, who thought that stock market boom during the “roaring twenties” hit a “permanently high plateau”, this 1999 CNN video during the glory days of the dot.com boom exhibits the same “this time is different” mania outlook we seem to be witnessing today.

As the Zero Hedge points out: (bold original)

In an effort to bring back some of that "memory" - and dispel the inevitable recency bias (and cognitive dissonance) as even the Fed is admitting markets are frothy, we bring you 1999's CNN Special "The New Economy - Boom Without End."

A brief clip from the archives full of internet dreams, globalization hopes, growth without inflation, and most importantly productivity gains. It seems we weren't that far off 14 years ago as Ed Yardeni notes, the internet is an inherently price-deflating animal (in its global competition exposing ways) which means - for firms to maintain profits (and stock prices), they must increase productivity... or in the modern parlance cut costs and lay off workers. "The economy has changed for good..." sums up the 'it's different this time' view of the 90s bubble.

Stephen Roach notes at the time - "if we are not in a new economy and the 'old rules' come into play from time to time, then much of what has happened in the 1990s will ultimately be challenged." Indeed Stephen...

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Fait accompli

This is how Wikipedia describes the dot.com’s transition towards the bubble bust: (bold mine)

Over 1999 and early 2000, the U.S. Federal Reserve increased interest rates six times, and the economy began to lose speed. The dot-com bubble burst, numerically, on March 10, 2000, when the technology heavy NASDAQ Composite index, peaked at 5,048.62 (intra-day peak 5,408.60), more than double its value just a year before. The NASDAQ fell slightly after that, but this was attributed to correction by most market analysts; the actual reversal and subsequent bear market may have been triggered by the adverse findings of fact in the United States v. Microsoft case which was being heard in federal court. The conclusions of law, which declared Microsoft a monopoly, were widely expected in the weeks before their release on April 3. The following day, April 4, the NASDAQ fell from 4,283 points to 3,649 and rebounded back to 4,223, forming an intraday chart that looked like a stretched V. At the time, this represented the most volatile day in the history of the NASDAQ.

On March 20, 2000, after the NASDAQ had lost more than 10% from its peak, financial magazine Barron's shocked the market with its cover story "Burning Up". Sean Parker stated: "During the next 12 months, scores of highflying Internet upstarts will have used up all their cash. If they can't scare up any more, they may be in for a savage shakeout. An exclusive survey of the likely losers". The article pointed out that "America's 371 publicly traded Internet companies have grown to the point that they are collectively valued at $1.3 trillion, which amounts to about 8% of the entire U.S. stock market".

By 2001 the bubble was deflating at full speed. A majority of the dot-coms ceased trading after burning through their venture capital, many having never made a profit. Investors often referred to these failed dot-coms as "dot-bombs"

Again monetary tightening emerged to expose on the delusions of "this time is different" brought about by a antecedent inflationary boom.

And as the chart above shows (bigcharts), the bursting of the dotcom came with a furious denial phase (red ellipse)

The dot.com has been a product of a series of easing monetary policies—the Plaza and Louvre Accord, BoJ easing which spurred the Yen “carry trade”, and the Fed’s lowering of interest rates—all of which piggybacked on the ‘displacement’ brought by the internet revolution, as Mises Wiki describes here.

The mania character of "This time is different" has been etched in the history of crises, Harvard’s Carmen Reinhart and Kenneth Rogoff admonishes:

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crisis is something that happens to other people in other countries at other times; crises do not happen here and now to us. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many previous booms that preceded catastrophic collapses (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes…

Inflationary permanent quasi-booms all end up the same way...