In March 2000, Barrons predicted massive tech failures in an article titled “Burning Up; Warning: Internet companies are running out of cash—fast.” The Federal Reserve raised interest rates which lead to an inverted yield curve. March 10, 2000 is the day the Dot.com bubble popped. In April 2000, the Nassau crashed by 34.2% and hundreds of tech companies nose dived more than 80% in valuation. $8 trillion in wealth vanished overnight.
Back in 1999, everyone seemed to know that a market crash was coming. Stock advisors told their clients that tech stocks were overvalued. 1999 reminds me a lot of 2019.
The major cause of the Dot.Com Bubble was the Taxpayers Relief Act Of 1997 which lowered the maximum tax rate on capital gains for individual investors from 28% to 20% for equity held for more than 18 months. This law incentivized average investors to speculate on the super hot tech stocks.
In addition, bubbles are always caused by easy capital, speculation and innovation. Today’s innovation buzzwords include the “internet of things,” blockchain, artificial intelligence, virtual reality, machine learning and the Gig economy.
In 1999, tech stocks rose as fast as 300% to 1900% as opposed to 350% increases in 2019. In 1999, 550 tech companies went IPO, cashing out billions for venture capital funds. Venture capitalist made over $43 billion between September 1999 and July 2000. The losers were average people; the average 401k lost 25%-35% of it’s value.
In 1999, the cyclically adjusted price-to-earnings (CAPE) ratio of the S&P averaged 45 compared to long term averages for the traditional 12-month rolling PE (price-to-earning) ratio of 16. When earnings are low, the traditional P/E jumps up and makes shares look overpriced. When profits are high, they make the traditional P/E look like a great buy. Cyclically adjusted P/E (CAPE) ratio corrects the “illusion” caused by fluctuating earnings.
The problem with the stock market today is that profits are being driven by unsustainably low-interest rates and over $8.8 trillion in corporate debt. For example, the corporate growth rates have been outpacing GDP growth.
It is alarming that the cyclically adjusted P/E (CAPE) ratio today hovering around 30 is almost exactly the same as the eve of the 1929 crash. In fact, the greatest economist in the world reknown Yale economist Irving Fisher resolutely predicted that if a correction came it would look like a harmless slump because the tradition P/E (price to earning) ratio was along historical averages.
On October 15, 1929 (just days before the Great Crash), Fisher predicted that stocks prices were in alignment to corporate earnings and “what looks like a permanently high plateau… I expect to see the stock market a good deal higher within a few months.“ Fisher lost his reputation by making the same mistake as economists today who are overlooking the cyclically adjusted P/E (CAPE).
The tech bubble will pop. It’s impossible to know when precisely but it will happen in the near future.
If the Dot.com serves as a predictor, over 200,000 tech workers will lose their jobs after the crash, the stock market may lose 30%-40% of it’s value and venture capital funding will dry up.