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The DotCom Crash Revisited
woginuk writes "At 9:00pm GMT today , it will be exactly 5 years since the Nasdaq reached its highest level, 5048.62. From there on it has been downhill all the way. Most of us have been affected by it, one way or the other. The Guardian has a story looking back on the moment and succeeding events."
Well, that's a little bit strong, don't you think? The .com collapse was really tragic, but it was far from unpredictable, hysterical, or preventable. Just basic macro economics -- when there are economic profits (not just accounting profits) in a market then entrance is encouraged, and when these profits dry up then the market participants take a while to come back down to equilibrium, just likePavlov's dogs took a good while to stop salivating when the dinner bell was rung.
I more agreed with Julie:
Boy, how true did that turn out to be?
adam b.
There is a quote in that article by Rob Hersov that describes the way a lot of people felt at that time:
"Those were incredibly heady days," he says. "Fun - absolutely. We thought we were making a difference. We thought we were getting out there, shaking things up, doing something no one had done before. We really were pioneers - buccaneers."
That statement demonstrates the two truths of the dot com explosion: on one had, we really did make a difference - we built a huge IT infrastructure in, essentially, the blink of an eye. On the other hand, that statement is packed with the hubris and exaggerated sense of importance that also permeated the time.
The analogy was often made in 2000/2001 of the Detroit auto industry and the development of the US national highway system. The same thing happened with scores (or maybe it was hundreds?) of companies popping up with the word "motors" in their name during the period. And now there are 3; the big 3 left in Detroit.
Not only that, but barring e-Bay and a few other notables, the companies that made it out of the bubble are ones with unique brand names: Google, Amazon, Travelocity, Yahoo!, and GoDaddy.
I also disagree with the apparent conclusion that there are no lone wolves anymore. The climate is better for a savvy lone wolf than it was even in 1997, I believe.
Who came up with the e-Idea of e-Appending e-E to e-Everything anyway?
I Want To Believe
Paul Graham has an interesting essay on "What the Bubble Got Right". It's worth remembering that some of the companies that lost 90% of their value are still worth billions today - e.g. Yahoo.
Looks like the server's smoking already - you can at least get the text from Google's cache.
Meep meep
I remember there was a pretty interesting comparison to the railroad boom and bust posted here a couple of years back, unfortunately I couldn't find a link to it. I think the railroad boom came in two waves, the second boom started about 5 years after the first and was much larger, and the bust was more devastating too. So we could be in for another bubble soon.
Also, here is an interesting read. I don't see the date on the article, but the wayback machine has it on Mar 2001, so it was probably written right at the peak.
Well, I moved to Silicon Valley in 1983. Back then everybody talked about how expensive houses were (a nice house was in the high 100-low 200k) and how overpriced the real estate market was. Save for a minor dip in the 90's housing prices have never fallen in 22 years. The median price in Santa Clara County (not where Larry Ellison & Steve Jobs live... where regular folks live) is $615k.
"I'd rather be a lightning rod than a seismometer." -Ken Kesey
Read about the California Gold Rush, and mentally timeshift the dates and where appropriate substitute gold oriented things with computers.
The biggest difference between the two is that California was not settled at the time and it was most difficult to get basic necessities. Otherwise, same shit different day. People think they can get something for nothing.
1. Foreign countries decide propping up the dollar is a bad bet, and so start pulling out, slowly.
2. Other countries see this and the acceleration begins, with no country wanting to be the last one holding dollars.
3. The fall of the dollar continues, picking up speed.
4. Interest rates get raised quickly to encourage foreign investment despite the weak dollar.
5. The real estate market collapses.
6. Taking the stock market with it.
7. The U.S. economoy goes into recession.
8. Bush White House continues spending on wars.
9. The recession turns into a near-depression.
10. The rich buy up houses and land and everything of value, at dirt-cheap prices.
11. The U.S. is now a sharecropper economy, with 90% of the population being renters, and the rich being the owners.
Home prices have yet to crash. Everyone keeps talking about how we had a 'soft landing'... it was soft because of low interest rates that have allowed people who really can't afford housing to get into the game. Wait until the housing bubble pops. Then, we'll get what we should have got when techs crashed... it's gonna be painful, real painful. All one needs to do is read a bit of history to understand how insane real estate prices in America have become. American debt is at an all-time high. We owe way too much money. Home prices have been going up by 20 and 30% annually in many areas... pay checks haven't... is it just me, or do others find this odd?
The Nasdaq did indeed crash, in every sense of the word. Just look at the declines in ALL the big names, and most of the small names, top to bottom. Many former $100, 200$ stocks traded to oblivion or a fraction of their former highs. Look at former high fliers like CMGI for an example, or RBAK perhaps even better!
QCOM (post split) 100 to 11, 90% decline.
RBAK Now 6.52. When you factor in all the splits it was something like 14,000.
CMGI - was 163ish now 1.92.
JNPR now 22.34. Sounds like an ok stock, until you realize its high was almost 245$.
And the list goes on. And on.
These examples are the definition of a bubble and a crash, a (hopefully) once in a generation event.
Save for a minor dip in the 90's housing prices have never fallen in 22 years.
That's precisely the kind of thinking that makes crashes possible. When everyone believes something is a safe bet, they discount risk more and more. Market phenomena often work themselves out over decades, which is beyond most people's attention span.
Take stocks for example. From 1980 to 2001, stocks were the right place to be. When a trend lasts that long, it changes people's attitudes. In 1980, most people were very nervous about stocks, because they had spent the previous couple decades sucking.
If you bought the Dow Jones in 1929, you had to wait until 1956 just to break even. And this isn't such a rare outlier. If you bought in 1966, you didn't break even until 1983. Once you include taxes and fees, it was more like the early 90s.
It takes a while for attitudes to shift. Despite the bubble popping, lots of people still believe that their 401k is going to grow at 7-10% per year. That's not necessarily true anymore.
America's economic fundamentals are troubling. We actually spend 5% more than we make. With no domestic savings to fund future growth (or even service our existing debts), we're dependent on foreign investors. And the foreign investors are getting very nervous as the dollar continues to slide.
"The danger is not that a particular class is unfit to govern. Every class is unfit to govern." - Lord Acton
Much the same way as there's a certain intrinsic value in real estate. You need to remember that part of real estate is all about location, which is not intrinsic.
Uh, last I checked, you buy a property in Manhattan, whatever happens to the real estate market, your property is still in Manhattan.
Location is intrinsic. The value of that location is not intrinsic, but that value itself is linked to intrinsic, er, properties (for lack of a better word). For example, New York was built where it is because it is on top of one of the greatest natural harbors in the world. That is never going to change, so the value of a particular property in New York will likely not fluctuate all that wildly - it does have a certain intrinsic value based on physical properties of the location that will never be altered.
Beyond that, I just don't think there is any comparison between real estate and stocks. When you buy a stock you are buying a piece of paper - you're no longer even buying the promise of dividends (which is why people used to buy stock), because most technology companies have chosen to forego dividends and instead reinvest that money into company growth. The unspoken expectation between company and investor is that eventually there will be a dividend payout and all that investing will have counted for something, but this expectation was sort of turned on its ear during the dot-com bubble and people started investing instead with nothing but the expectation that the stock would go up. They had no idea why they were actually doing it; it was not based on anything.
Then we had the crash, which knocked some sense back into these people. Those who argued that you buy stock based on company fundamentals and not speculation were vindicated. Something similar could happen in real estate, but never on that scale because after all, when you buy real estate you are buying a tangible asset, not a piece of paper that is already priced based on the expected position of the company five, ten, even twenty years in the future.
In both cases, the price you pay is the intrinsic value of the item, plus all of the abstract hard-to-quantify stuff.
This is not at all true. When you buy stock you are not paying for the intrinsic value of anything. You are paying for the expected future intrinsic value of a company, based on its P/E ratio.
To make stocks and real estate equivalent, a seller of a home or a piece of land would have to say to you "this home may only be worth $300,000, but I am going to charge you $2.4 million because that is what I believe it will be worth 20 years from now." Obviously, nobody buys real estate like this, but it is exactly the way people buy stocks. Stocks have a certain level of inherent speculation (even if you're buying "value" stocks, the P/E ratios are rarely less than 8 or so... with tech stocks they're usually more like 60 or 70), whereas real estate is always sold for what it's valued at today.
So the prices of real estate can go up and down, but because there is little speculation involved (unless you're buying undeveloped land in the hope that it will eventually be developed), there is little risk of a sharp downturn. That's as true now as it ever was. I mean, people have been saying for 100 years that real estate is overpriced, but how much do you think an average home built in 1900 costs today compared to what it cost at that time? Real estate prices will only continue to rise over time because there are only so many places to live in this country and a lot more people both being born and moving in every day.
Stock prices are really anybody's guess. They've trended upwards over time just as real estate has, but they've always been subject to severe corrections, bubbles and overall fluctuations than real estate has.