The Second Dot-com Bubble Is Bursting

Is the second dot-com bubble bursting?

“Irrational exuberance”

Former Federal Reserve Chairman Alan Greenspan first uttered the phrase in 1996, describing what he considered an alarming economic trend. The rise of home internet usage was spurring several investors to stake digital claims like an online Oklahoma land run. Tech companies sprang up overnight, each hoping to draw big money from a seemingly limitless well of capital funds. No matter what parcel of virtual space you bankrolled, you were almost guaranteed a profitable return—almost.

This was, in part, the setup for the infamous dot-com bubble and its catastrophic burst. America’s first tech boom, the dot-com years got their name from companies operating entirely through online enterprises. It swelled to preposterous size and peaked somewhere between Bill Clinton’s impeachment and 9/11. The Enron scandal of 2001 effectively eulogized the era.

At first all you needed was a good idea and a domain name. The selling price of your product depended on its irreplaceability, which is largely true today. Adobe pioneered digital media software. Booking Holdings rounded up airline connections through Priceline and Kayak. Amazon cornered online shipping while eBay became the internet’s first major auctioneer. Brokers and investors at NASDAQ and the New York Stock Exchange were pumping millions of dollars through novel corporate channels.

The Taxpayer Relief Act of 1997 lowered tax rates on income from trading stocks, or capital gains. For big investors, lower tax rates mean higher profit ceilings. The Act simply raised the roof, encouraging further hasty investment. In response, tech companies everywhere made their shares available for public purchase. High rollers blindly sank their fortunes into start-ups, anticipating huge returns. Some were so confident, they borrowed additional funds from brokers to invest even further, an expense known as marginal debt. The bubble inflated.

A burst in slow motion

It was unstable, it was hubris. It was the nineties. Margin debt hit an all-time high during the fervor. Pressure for dot-com companies to make it big skyrocketed. Who would survive? Ill-prepared competitors folded fast, exposing the key players (Google hadn’t entered the fray yet, and wouldn’t until 2004). Like the immortal yet ever imperiled Highlander, there could only be one. 

When a dot-com company fell, its investors fell too, hard. Divining a dot-com’s earning potential soon became all but impossible while discrepancies between stock prices and profits widened. Opportunities for profit dwindled as quickly as they appeared. Meanwhile, federal interest rates had been climbing. The US Central Bank raised the rate six times in just ten months, up to 7%. The rich considered this a chokehold. By 2000, borrowing money was no longer worth it.

News of a Japanese recession troubled venture capitalists. Rumors of an impending panic stirred. Why would the world’s most technologically advanced nation experience a recession when demand was high? Looking around them, only a handful of dot-coms survived long enough to pay dividends. Too many had gorged themselves on invested capital. 

For investors, there was no way out. They had gone all-in, and it was too expensive to buy more money. Their prospects proved a total bust, and they still had to repay their lenders. Saddled with marginal debts (around $500 billion today), the hands that fed soon vanished. The bubble did not burst. It ruptured like an organ, and killed just as slowly.

First generation dot-coms laid off anywhere between 14,000 and 18,000 employees, maybe more. By eliminating the income of thousands, the remaining companies exemplified a vicious form of resilience. Each had gifted themselves a chance to redefine the tech industry. From that point on, it was their game to lose.

History doesn’t repeat, it rhymes

It took over a decade of war, high unemployment, and terrible politics for the economy to resemble something “normal.” Now that so-called normalcy is near the vanishing point of the same black hole that swallowed our pre-COVID world. This isn’t exactly breaking news. Enough articles exist about whether our current economic climate is a reincarnation of the bubble burst (it is). Today’s tech giants have made that perfectly clear.

The first symptom of financial inflammation is an increasing number of Initial Public Offerings, or IPOs. That’s when a company “goes public” with their shares, hoping to hook new investors. 480 opened in 1999, a record-high. The first year of the new millennium saw an estimated 446. A modest decline, but nothing compared to the dismal figures of 2001, in which only ninety-one IPOs opened.

From 2015 to 2019, anywhere from 133 and 255 opened annually, similar to rates in the late nineties. 480 companies went public in 2020, a new record high. IPOs in 2021 far surpassed the year-old high water mark at one thousand and thirty-five.

See also: Salesforce lays off hundreds as downsizing sweeps big tech

Layoffs are perhaps the most visible symptom of a spiraling economy. Less obvious is precariously high marginal debt. That figure peaked among investors in 2021. This is one of those situations where the fewer points you have, the better. When marginal debt stalls, or “calms,” investors get antsy. They want your account to have padding in case your tech start-up falls, too. To secure that, they can move to “liquidate your long holdings,” essentially everything you own. That grim prospect scares companies into selling off stock at a bad time in an effort to pre-empt it.

The last major player in the first burst is also the latest to the reunion. Previously held in check like the Titans in Tartarus, federal interest rates have flatlined at less than .5%, but that figure is changing. The US Central Bank threatens to go as high as two percent by the end of this year. That chokehold isn’t choking investors just yet, but Uncle Sam always has his arm wrapped around their necks. Threatening to activate that grip right now is soaring inflation, which wasn’t a factor in the first bubble burst. With that in the mix, conditions are ripe for another explosion.

The vicious mechanics of the dot-com bubble, along with the great recession, now serve as a stress test for the survivability of one’s investment portfolio. Imagine you have enough wealth at your disposal that this is one of your problems. Investors today propose another stress test in addition to those of the dot-com bubble and the great recession. They recommend meeting with your accountant to see if your portfolio can survive 2022’s rising interest and inflation rates.

Meanwhile, I found a quarter under my desk while running the vacuum cleaner.