It is easy to look at today’s crop of sinking IPOs—like Uber, Lyft, and Peloton—or scuttled public offerings, like WeWork, and see an eerie resemblance to the dot-com bubble that popped in 2000.
Let’s first understand what exactly that bubble was: a mania of stock speculation, in which ordinary investors—from taxi drivers to Laundromat owners to shoe-shiners—bid up the price of internet-related companies for no good reason other than “because, internet.” Companies realized that they could boost their stock price by simply adding the prefix e- (as in “e-Bay”) or the suffix com (as in Amazon.com) to their corporate names to entice, and arguably fool, nonprofessionals. “Americans could hardly run an errand without picking up a stock tip,” The New York Times reported in its postmortem.
As prices became untethered from reality, the Nasdaq index doubled in value between 1999 and 2000 without “any plausible candidate for fundamental news to support such a large revaluation,” as the economists J. Bradford DeLong and Konstantin Magin wrote in a paper on the bubble. The crash was equally swift and arbitrary. Between February 2000 and February 2002, the NASDAQ lost three-quarters of its value “again without substantial negative fundamental news,” DeLong and Magin wrote. By late 2000, more than $5 trillion in wealth had been wiped out. This sudden rise and sudden collapse in asset prices—without much change in information about the underlying assets—is the very definition of a bubble.
The current situation is different, in at least two important ways.
by Derek Thompson, The Atlantic | Read more:
But if you look closer, today’s correction isn’t much like the dot-com bubble at all. In fact, it might be more accurate to say that what’s happening today is the very opposite of the dot-com bubble.
- Both then and now, consumer-tech companies spent lavishly on advertising and struggled to find a path to profit.
- Both then and now, companies that bragged about their ability to change the world admitted suddenly that they were running out of money.
Let’s first understand what exactly that bubble was: a mania of stock speculation, in which ordinary investors—from taxi drivers to Laundromat owners to shoe-shiners—bid up the price of internet-related companies for no good reason other than “because, internet.” Companies realized that they could boost their stock price by simply adding the prefix e- (as in “e-Bay”) or the suffix com (as in Amazon.com) to their corporate names to entice, and arguably fool, nonprofessionals. “Americans could hardly run an errand without picking up a stock tip,” The New York Times reported in its postmortem.As prices became untethered from reality, the Nasdaq index doubled in value between 1999 and 2000 without “any plausible candidate for fundamental news to support such a large revaluation,” as the economists J. Bradford DeLong and Konstantin Magin wrote in a paper on the bubble. The crash was equally swift and arbitrary. Between February 2000 and February 2002, the NASDAQ lost three-quarters of its value “again without substantial negative fundamental news,” DeLong and Magin wrote. By late 2000, more than $5 trillion in wealth had been wiped out. This sudden rise and sudden collapse in asset prices—without much change in information about the underlying assets—is the very definition of a bubble.
The current situation is different, in at least two important ways.
by Derek Thompson, The Atlantic | Read more:
Image: Brendan McDermid/Reuters
