The Nasdaq Composite index has already lost more than 30% since the beginning of the year. And according to Alan Greenspan, the iconic chairman of the Fed, if the stock market falls by 30-40% in a few weeks or months, then it's a bubble.
So, what's in our yard? Maybe this is the dotcom 2.0 crisis?
The Dotcom Bubble in 2000: How the market collapsed 20 years ago
From 1995 to 2001, the stock market was overwhelmed by a wave of HYPE associated with the development of the Internet. Numerous Internet startups with "brilliant business ideas" and a complete lack of net profit began to enter the IPO. But investors were ready to invest long-term.
In 2001, the NASDAQ index collapsed, the so-called "dotcom bubble" burst. This was provoked by two factors:
- The crisis in Japan provoked an outflow of Japanese investors from the American stock market - in particular, from dot-coms.
- It turned out that for 5 years, many Internet projects have not learned how to generate profit, but at the same time they coped well with spending money on advertising their own brand. News about bankruptcies and criminal cases involving blatantly fraudulent schemes began to appear more and more often.
As a result, the bursting of the bubble in 2002 was followed by a short recession. Even strong companies have suffered huge losses, losing a significant part of their market value. However, later most were able to recover - for example, Amazon, Ebay, Yahoo (now owned by Verizon).
What does the bubble of 2000 have in common with today?
Behind any bubble there is a new idea, a myth. This is usually facilitated by the aggressive growth of some technology and a burning belief in it. There is talk of a "new world" and a "new economy". Then, at the end of the 90s, the shares of companies with the cherished ".com" in their names flew away like hot cakes. Approximately the same thing is happening today, only the "fetishes" are new: "crypto", "green", "IT projects".
During the bubble inflating period, the value of shares significantly exceeds the fundamental indicators of the company. During the dot-com era, investors were willing to buy the securities of unprofitable companies for the long term. Economists also echoed them - "these are growth stocks", "a new economy has come." Even today, investors, looking at the success stories of American big techs like Google or Facebook, are trying to find promising companies without bothering much with their fundamental assessment.
Inflating the bubble is greatly facilitated by the influx of cheap money into the economy. There is an opinion that in the 90s the Fed contributed to the dot-com crisis by maintaining a low interest rate: investors had a lot of extra money that went to the stock market. In the 2000s, the key rate, on the contrary, was sharply raised - so the market "deflated".
Despite the fact that now there is an order of magnitude more money poured into the economy than in the late 90s, because then there was no "quantitative easing" in sight. And the "low" Fed rate of that time, 5%, does not look so low: today it is about 1%.
In addition, inflation in the period 1995-2000 was in the range of 1.5-3.5%, while now it is above 8%.
All this suggests sad thoughts: the dotcom bubble of 2001, compared with the impending crisis, may seem like a burst balloon against the background of the big bang.