Great Dot-Com Bubble Fueled by New Industry Hopes and Surging Liquidity
Dollar Strength Led to U.S. Manufacturing Weakness and Liquidity Decline, Triggering the Burst
Assessing the Current Strength of the Broader Economy Remains Key
Recently, there has been growing controversy over a potential artificial intelligence (AI) bubble. Since the emergence of ChatGPT at the end of 2022, debates about an AI bubble have repeatedly surfaced. However, whether this is truly a bubble or not will only become clear with time. Nevertheless, we can look to the past for reference. Given that AI is a cutting-edge IT technology, we may find clues in the dot-com bubble that occurred between 1995 and 2000.
On November 17, DB Financial Investment released a report titled "Lessons from Dot-Com Stocks Between 1995 and 2000," analyzing that whether or not the AI bubble will burst depends on how robust the rest of the economy is, excluding industries related to AI.
Dot-Com Bubble Fueled by 'New Industry Expectations, Increased Liquidity, and a Strong General Economy'
From 1995 to 2000, internet traffic in the United States increased by more than 100% each year. Companies like Google and Amazon emerged during this period. The expectation that communication efficiency would improve through email and that consumption would expand via e-commerce led to the rise of the so-called "New Economy" theory, which argued that growth could be sustained.
(Photo by Bloomberg News) Amazon's e-book reader 'Kindle'
What ignited the dot-com bubble was an abundance of liquidity. In 1997, Asia experienced a financial crisis, and in 1998, the United States faced the LTCM crisis. The Federal Reserve implemented surprise interest rate cuts to prevent the spread of these crises. In 1999, financial regulations were eased in the United States. The Federal Reserve, concerned about the Y2K problem (the potential for computers to misinterpret the year when transitioning from 1999 to 2000), injected large amounts of capital into the market.
During the dot-com bubble, the general economy-excluding new internet-related industries-was also solid. After the Asian financial crisis, the prices of manufactured goods produced in Asia fell, allowing American consumers to purchase imports at lower prices. As consumption increased, the overall economy entered a boom period, and investors were able to invest in dot-com stocks without significant concern.
Dot-Com Bubble Burst Due to 'General Economic Deterioration, Decreased Liquidity, and Lowered Expectations for New Industries'
Before the dot-com bubble burst, warning signs began to appear in various sectors. U.S. manufacturing weakened from the end of 1999 as the strong dollar persisted due to factors such as the Asian financial crisis. Manufacturing industries unrelated to the internet struggled with declining price competitiveness in the global market. As the credit ratings of leading manufacturing companies deteriorated one after another, a credit crunch in the real sector spread to the financial markets. Ultimately, as liquidity decreased, investors began to sell shares in dot-com companies.
After March 2000, as the dot-com bubble collapsed, a more sober assessment of the growth stories of new industries emerged. A notable example was the changing perception of "vendor financing" by major internet companies. For instance, during the height of the dot-com bubble, Cisco Systems, a network equipment company, expanded its business by providing financial support to client companies, which then purchased Cisco Systems' equipment. Despite the inherent risks of vendor financing, Cisco Systems' stock price soared, and it was hailed as "the most valuable company in the world." However, as the stock price declined, investor concerns over "vendor financing" intensified, even though the company had posted strong results through the third quarter of 2000.
The lesson from the dot-com bubble is that "focusing solely on AI-related industries does not reveal the direction of the AI bubble." Kang Hyunki, an analyst at DB Financial Investment, stated, "The past dot-com bubble stemmed from the weakening of the general economy, which was unrelated to the internet," and analyzed, "The continued rise in AI-related stock prices these days may also depend on the strength or weakness of the broader economy."
It is also noteworthy that just before the dot-com bubble burst, the stock market and the high-yield (junk bond) market moved in opposite directions. From the end of 1999 to March 2000, the peak of the dot-com bubble, internet-related stocks accelerated upward for four months, but the U.S. high-yield spread actually worsened. When diagnosing the AI bubble, the answer may lie in unexpected places.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
