The 1989 Japan bubble popped when that country’s central bank reversed an ultra-easy money stance by raising short-term interest rates–sharply.

In the US in 1999, the situation was considerably different from Japan ten years earlier. Interest rates were slowly rising throughout the year, as the Fed withdrew extra money put into the system in 1997-98 for two reasons:

–to smooth out ructions in smaller Pacific Basin stock markets caused by a year-long series of speculative attacks on their currencies

–the aftereffects of the collapse of Long Term Capital, a hedge fund that used enormous financial leverage to speculate in illiquid (“off the run”) Treasuries, and whose positions were so gigantic that its failure threatened the stability of the domestic bond market.

These rate increases had no visible effect on US stock market indices, however, since monetary policy was considered to be still relatively loose.

There were three big themes to US stocks in 1999:

—Y2K, the idea that the date function in the oldest computer programs, which formed (and still do, I think) the guts of most commercial bank and government software, only went up to December 31, 1999. Some, spearheaded by economist Ed Yardeni, argued that one tick after midnight on New Year’s Eve, these programs–and the world financial system along with them–would stop working because of this. No bank statements, no ATMs, no trade finance, no government paychecks…and worse.

The main effect of this worry–survivalist hoarding aside–was that the Fed kept overall policy looser than it would have and made sure plenty of cash was in circulation.

—internet + cellphone infrastructure, whose buildout around the world caused a boom in most related sectors, from semiconductors to component manufacturers to contract assemblers to installing access and transmission devices to cell towers and underground/undersea cables

—internet-based businesses, from AOL to Pets.com to Yahoo/Google to Amazon. To my mind, Wall Street understood very little about e-anything, and so relied heavily on information from two wildly optimistic gurus, Henry Blodget of Merrill and Mary Meeker of Morgan Stanley. IPOs flew hot and heavy during the year, and, in usual form, when the supply of high-quality firms wanting to go public ran out, underwriters cheerfully offered what turned out to be total trash. Blodget later agreed to a lifetime ban from the securities business to settle SEC charges of securities fraud. The charges were based on, as I understand it, sharp differences between bullish public statements about IPO candidates and negative assessments of the same companies in his private emails

–TMT. These hot themes were clumped together as Technology-Media-Telecom, or TMT. I wasn’t so interested in media back then, so I know TMT mostly as an acronym. The crowning excess in the media area, as I recall it, was the acquisition of AOL by Time Warner for $128 billion in early 2000. It was the biggest acquisition in history at the time, and an utter failure. AOL proved to be an empty shell, with its “walled garden” version of internet access already in steep decline. Time Warner wrote off $99 billion two years later.

the collapse

Several things happened all at once in early 2000:

–there were no Y2K computer disruptions, either because of heroic reprogramming work or because there was never a problem in the first place

–internet/telecom providers’ massive infrastructure expansion plans proved way too ambitious. Researchers found that by separating a beam of light into different frequencies a ton of signals could be sent through a single strand of fiber optic cable. That made the huge cable-laying projects then underway redundant, forcing many of the firms involved–from materials to construction–into bankruptcy. Cellphone network expansion hit a wall at the same time. I don’t think there was a similar technological breakthrough, but at any rate overcapacity suddenly became a severe problem, particularly for component suppliers

–in Wile E Coyote fashion, it dawned on Wall Street that some of the latest and greatest IPOs were little more than pencil sketch musings about could-be, might-be business opportunities, not already functioning, rapidly expanding, soon-to-be-profitable enterprises. So the IPO market dried up.

two 2000 markets–ugly and uglier

the ugly

The S&P 500 peaked in December 1999, fell mildly, returned to the highs in April 2000, then fell again and regained the former highs in August. Then the world entered recession, which by September 2002 had cut the S&P in half.

the uglier

NASDAQ peaked in February 2000, fell by a quarter by May, returned to 10% below the prior peak in August and then dropped to a quarter of its peak at the bottom in September 2002.

thoughts looking back

I had a very tech-heavy portfolio in 1999. Even I, someone who isn’t good at this, saw the market top forming early in 2000. I sold 40% of the TMT I owned before prices really began to drop. I thought this was a very aggressive move, but it wasn’t anywhere near enough to keep me from underperforming the S&P 500.

The market changed direction very sharply away from TMT toward low-growth, low PE defensive areas, like utilities and consumer staples. I didn’t have enough imagination to understand that these ostensibly dead end sectors were going to be shelter-from-the-storm market stars for a period of time. I could have saved myself a lot of grief by doing a better job of identifying where to rotate my portfolio to.

At the 2002 bottom, the dividend yield on stocks in the UK market was higher than the coupon on UK government bonds.

lessons for today

I don’t think that brokerage houses and individual analysts are anywhere near as powerful today as they were back then. Given that, my hunch is that today’s SPACs are the equivalent of the late-stage no-fundamentals IPOs of late 1999.

I also think that the key to today’s market is ultra-low interest rates caused mostly by the pandemic, partly by the growth-retarding policies of the Trump administration. That’s as opposed to TMT earnings falling off a cliff. So the next trigger for market change will likely be the pandemic coming under control–something whose beginnings we could arguably see in early Spring.

more tomorrow