Tech Brew Ride Home - (IHP) How The Dotcom Bubble Happened

Episode Date: November 23, 2023

From the Internet History Podcast, the background, root causes and rough outline of the dotcom bubble. How it happened, why it happened... and why it's unlikely to happen again anytime soon. Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to the Internet History Podcast. I'm your host, Brian McCullough. Happy New Year, everybody.

As promised, here is a long overdue chapter episode for you. It's about something that I've wanted to delve into really from day one of this project. It might even be the reason I started this project, telling the story of the dot-com bubble. What you're going to hear today is obviously a first first. draft of one of the chapters that I've been working on for the forthcoming book. There will be at least two, maybe three chapters in the book covering the dot-com bubble. It's bursting and its aftermath. And this one will obviously be the first of those. It's about the roots and causes of the dot-com bubble. So I'm going to label this episode, Chapter 8 on the website, even though at this point it's either

chapter 10 or 11, depending on how I end up splitting things up. But as I said before, the podcast is not going to line up with the book exactly anyway, so please enjoy, as once again, you get to listen in as I work out my researching and writing in real time. For people of a certain age, my grandparents, for example, the Great Depression was not just a historical event. It was an economic and social apocalypse that simply by having occurred once could ipso facto recur at any time. The Great Depression played on their minds like a psychic bogeyman. Anytime things got too good, that could only mean that a crash was right around the corner. In many ways, I feel like the dot-com bubble and its subsequent bursting

have been a similar bogeyman, at least to the tech industry in Silicon Valley. Anytime a new technology leads to the proliferation of startups, anytime venture capital investments increase year over year, anytime company valuations pass stratospheric levels and high-profile IPOs hit the market, people inside and outside of tech seem to fall all over themselves to declare that a new bubble is here, and everybody should probably head for the hills. But the fact is, the dot-com bubble was a truly singular event,

brought on, as we'll see, by a unique mixture of causes, and the truth is we're unlikely to see its kind again in our lifetimes. That's not to say that bubbles in general can't happen. We certainly lived through a much more destructive one in housing and banking in the mid-2000s, And sadly, bubbles of one kind or another seem to be happening with greater regularity in our economy overall. But we're unlikely to see a bubble form in tech, which would have effects as wide-ranging as the dot-com bubble did, at least for the foreseeable future. And one of the reasons for this is the fact that although dot-coms give the bubble its name, there's a strong case to be made that the technology industry, was not directly responsible for the late 90s stock market bubble in the first place.

Friday, August 13th, 1982 might not sound like an important day to history, but in the annals of finance, it's one of the more momentous. That afternoon, the Dow Jones Industrial average closed at 78.05, up 11.13 points, or about 1.4% from the previous day's close of 776.92. The cause of investor optimism that August of 1982 was the announcement by the chairman of the Federal Reserve, Paul Volker, that he was cutting short-term interest rates by one-half of a It happened to be the third such rate reduction in six weeks, and it signaled two things. First, that the recent recession might be coming to an end, and second, that the high interest rates that the economy had been saddled with since the 1970s might be a thing of the past.

The announced rate cut that Friday morning predicted that interest rates were finally going to go lower, that the inflation dragon was finally tamed, and that the economy might be turning around. It turned out that the Dow Index would never again close as low as 776. In fact, by the end of 1982, it would cross 1,000, and in a few years' time, Friday the 13th of August, 1982, would come to be recognized as the beginning of the greatest bull market in American history. By the time the dot-com bubble burst in March of 2000, bringing the bull market to an end, the Dow and the S&P 500 index would have risen 10-fold, and the technology-heavy NASDAQ index nearly 30-fold.

There were some quite notable hiccups along the way, of course, but from roughly 1982 until the turn of the century, the stock market closed up year on year almost every single year. Even after the Black Monday crash of 1987, when the Dow lost 22% in a single day, investors that held on through the crash had more money on December 31, 1987 than they had on January 1, 1987. An entire generation of investors came of age believing that markets only moved in one direction, upwards. And if history tells us anything, it's that when people come to believe only good news can ever happen,

a speculative financial bubble is probably inevitable. The dot-com era was really the culmination, the euphoric end stage of this protracted bull market. The groundwork for the dot-com bubble came in the form of several long-term financial and society-wide trends that had nothing to do with Silicon Valley or technology. Between 1946 and 1964, 76 million Americans were born, and by the 1990s, this mega-generation was entering its 40s,

that time in most people's lives when they begin saving for retirement. Thanks to the baby boomer generation and their investment needs, Wall Street was coming to Main Street in a very big way in the 1980s. As the authors of the 1998 book, Boomeronomics pointed out, from VJ Day forward, whatever age bracket the boomers have occupied has been the cultural and spiritual focal point for American society as a whole. If the baby boomers were now interested in investing, that meant that America was now interested in investing. The sheer weight of their numbers, backed by the accumulated wealth from their prime earning years,

meant that there was suddenly a mountain of money looking for a place to go. Planning for retirement was something of a recent phenomenon for ordinary working Americans. The game plan for earlier generations had been to rely on traditional pension plans, usually financed by employers, and probably made up of a,

reasonably stayed mix of stocks, bonds, savings, deposits, and employer earnings and contributions. But something had happened that changed this setup. In the early 1980s, a man by the name of Ted Benna was the owner of an employee benefits consultancy in suburban Pennsylvania. While helping a local bank set up its employee pension plan, Bena took a hard look at an obscure clause of the Tax Reform Act of 1978. Clause 401K of the Act seemed to suggest that ordinary income earned by employees

could be sheltered from taxation, thereby creating an ideal vehicle for retirement savings. In 1980, Bena inaugurated the first 401k plan. The next year, 1981, saw Bena's scheme officially blessed by the Internal Revenue Service. Bena's brainchild took off like wildfire, and by 1985, more than 10 million American employees were enrolled. By 1991, fully one-third of retirement plans were 401K plans.

401Ks were popular with employers because they were less costly to manage and because they took the responsibility of directing investment out of the employer hands. 401Ks proved popular to employees for very much the same reason. Individuals, at least theoretically, were empowered to control

their own financial destinies. And so as Baby Boomers were handed the keys to these new investment vehicles, they increasingly filled them with stocks. Their parents might have had a fear of stock markets because of the harsh lessons of the Great Depression, but Baby Boomers had no

such aversion. The fears of an earlier age, the residual social memory of the consequences of excessive stock market speculation, were forgotten. The economist John Kenneth Galbraith described just this sort of generational turnover in investing philosophy in his book, A Short History of Financial Euphoria. For practical purposes, Galbraith wrote, quote, the financial memory should be assumed to last at maximum no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors,

with its own innovative genius, end quote. The baby boomers were immune to hoary old scare stories about investing with Wall Street. They were more than ready to roll the dice. Bonds had traditionally been the more popular option when investing for retirement, and this was because of their relative safety, to be sure, but also because for a period of time, especially the late 1970s, bond rates were so high in the early 80s, in fact a 10-year treasury number, could return nearly 15% a year, that they could offer better return than stocks.

But as the 80s dawned, with interest rates dropping over the course of that decade and into the early 90s, stocks began to be more appealing as a way to make your money really grow. This idea came to be reinforced by guru after financial guru, who over the course of the 80s and 90s popped up to assure investors that over the long term, stocks always outperformed bonds. Buy and hold, invest for the long term. These were the catchphrases that Wall Street and the investing experts drilled into everyone's head. One of the more prominent of these stock-promoting gurus was Jeremy Siegel, a professor of finance at the Wharton Business School. In his 1990 bestseller, Stocks for the Long Run, Segal meticulously laid out an argument that held that

stocks had actually outperformed bonds in every 10-year investment period since 1802. More crucially, he argued that, quote, there is no compelling reason for long-term investors to significantly reduce their stock holdings, no matter how high the market seems, end quote. The baby boomers thought of themselves as long-term investors. they were hoping not to need this money back for another 25, 30, maybe even 40 years. So they took this long-term advice to heart. By 1993, 401K investors were putting about half of their retirement savings into stocks.

The percentage of households invested in the stock market grew from just 19% in 1983 to over 49% by 1990. These were Americans who were entering the stock market for the very first time in their lives. By 1982, the median age of a new investor in the stock market mutual fund was 37 years old. And these were ordinary Americans. For most of the post-war period, investing in stocks had largely been a game for the upper classes. Well, no more. By 1992, 42% of the stock market was owned by Americans making less than $75,000 a year. That percentage was up from only 24% in 1983, and conversely, the share of the stock market owned by

Americans making over a quarter million dollars a year decreased from 43% to only 23% over that same period of time. And the advice that stocks were the best instrument for building wealth seemed to be borne out by results. The army of new baby boomer investors found a stock market that was, frankly, on fire. The overall economy performed much better in the 1980s than it had during the high-inflation, low-economic growth of the 1970s. And after a short but sharp recession in the early 90s, the American economy really boomed in the last decade of the 20th century.

U.S. GDP grew almost continuously for nearly a decade, increasing by 4% annually in 1994 and peaking at 4.8% annually by 1999. The stock market responded accordingly, hitting one new high after another. You might remember Barron's magazine reporter Maggie Mayhar from episode 67 of this podcast, and in fact I'll be quoting from that episode a couple times coming up here. But as Maggie Mayhar wrote afterwards, quote, it had taken the Dow 76 years to reach 1,000, a barrier that it breached for the first time in November of 1972. Another 14 years elapsed before the index crossed 2000 in January of 1987.

Dow 3,000 came four years later in the spring of 1991. Four years after that, in February 1995, the index broke 4,000. Before the year was out, the beast would demolish yet another record, driving the Dow straight through 5,000. Adding to this groundswell of wealth was the tidal wave of new money pouring into the stock market over the course of the 1980s and the 1990s, thanks to the baby boomers. As basic economics tells us, a flood of new buyers can lead to an increase in prices. Again, quoting Maggie Mayhar, An excess of money chasing two few goods always drives prices up, end quote. Not to be overly simplistic about the underlying economic causes of the Great Bull Market of 1982 to 2000,

but the baby boomer money coming into stocks over these decades, combined with positive economic conditions to lay the foundations of a speculative mania that predated the arrival of dot-com stocks. The dot-com bubble is called the dot-com bubble because of the hundreds of new technology stocks that debuted in the mid-to-late 90s, but the fact is the party had been going on for quite a while already.

The stock market, as represented by the S&P 500 index, returned 37.2% in 1995 alone. This was the best year for the stock market in more than 37 years. And in fact, despite the euphoria that would soon come later, it would actually be the best year the broader market would have over the whole of the 90s. And if we're being honest entirely, it's the best year the stock market has had since. When the dot-com companies announced their arrival with Netscape's spectacular IPO in August of 1995, the fact is that Wall Street was already in an embollient mood.

Again, quoting Maggie Mayhar, the dot-com stocks were the froth in the cappuccino. Even though companies like Yahoo, Amazon, and eBay, and many others were actually formed largely in the two years between 1994 and 1996, and generally went public in the two years after that, it wasn't until 1998 that the stock prices of dot-com companies began to demand attention. It took a while for dot-com stocks to stand out because, again, at the time, seemingly all of Wall Street was doing well. Even traditional old economy stocks were on a tear. During the time period from Netscape's IPO in August of 1995 to the beginning of 1999,

shares of traditional blue-chip companies like Procter and Gamble doubled. That's not a bad return for only 40 months. So at first, internet stocks didn't seem all that exceptional. If you weren't content with merely doubling your money on solid staid stocks like Procter and Gamble, then by 1998, you found yourself starting to look jealously at the returns that tech stocks were ringing up. A thousand dollars invested in Yahoo at its IPO was worth about $3,000 by January of 1998. Again, that's really not bad, tripling your money. Especially not bad when you consider that you only had to own shares of Yahoo for about 20 months to get that roughly 100% annualized return.

Similarly, an investment of $1,000 in the Amazon IPO netted you nearly 20,000. 900 by the beginning of 1998. Slightly worse than Yahoo, but then you only had to hold the shares of Amazon for about seven months in order to triple your money. So this was good, but not overly exceptional, at least when compared to the overall market. Everything changed, however, over the course of 1998. If you continue to hold on to your Yahoo and Amazon shares over the course of that one year, 1998, merely 12 calendar months, you would ring in the new year of 1999 to discover that your

original $1,000 investment in Amazon was now worth $31,000, and your $1,000 worth of Yahoo stock had ballooned to $46,000. Turning a $2,000 investment into $77,000 is phenomenal on any time scale, but to do so in less than 30 months is basically unheard of. And the funny thing was, getting this sort of return wasn't exactly rocket science. In the 12 months of 1998, Yahoo stock returned 584%. AOL returned 593%. And Amazon returned an astonishing 970%. These weren't exactly companies that no one had ever heard of.

AOL, Amazon, and Yahoo were three of the best-known, most talked-about stocks of the mid-90s, widely heralded as the vanguard of the new economy that the internet was supposedly bringing into existence. They were hardly needles in the proverbial haystack. In the last two years of the 1990s, seemingly any random internet stock began to feel like a sure-thing lottery ticket. And that is why we remember this period as the dot-com bubble. Buying and holding $1,000 worth of, say, real network's IPO shares

became nearly $20,000 in two short years. $1,000 into eBay's IPO would turn into $6,500 a mere three months later. And if you dared hold on to eBay for four more months, your stock was suddenly worth nearly $14,000,000, on sale, eBay's also ran competitor in the auction space might not be able to match that return, but nonetheless, it was still up 130% over the course of 1998. If you were lucky enough to invest in a little-known semiconductor and telecommunications

equipment maker named Qualcomm in January of 1999, by January 1,000, you would have turned $1,000 into $23,000. So money had already been. been cascading into stocks. The market had already been on a tear, and then the internet stocks showed up and began to take off like a rocket. Once they did so, investors clamored for more, eager to get in on the ground floor of the next Amazon or Yahoo. The dot-com bubble itself was actually a fairly compressed period of time, roughly two years from the spring of 1998 until the bursting of the bubble in the spring of 2000.

And over the course of those two years, it's worth noting that it was not entirely smooth sailing. There were plenty of times that the market would sink to dizzying levels in almost the blink of an eye. It's a little remembered now, but there were a series of mini-crisuses, the 1997 Asian financial crisis or the Asian flu, the 1998 ruble crisis after Russia default. on its sovereign debt, and the subsequent long-term capital management hedge fund insolvency crisis of later in 1998. These rocked markets worldwide, and the stock market overall could suffer

violent swings in either direction of five, even 10%, sometimes in the same week or month. In financial terminology, this is known as volatility, and it seemed to affect Internet and technology stocks especially. When in August of 1997, the Dow dropped 554 points in a single day, then the largest one-day point drop in history, although of course not as big as the 87 crash in percentage terms, technology stocks were battered more than most. It was the same in August of 1999 when the Dow lost 512 points in a single day. Some investors, especially big, institutional ones, were always concerned that internet stocks were a fad and often sold quickly at any signs of trouble. In late April of 1999, a leading index of internet-related stocks had lost

32% of its value in just four trading days. And obviously, not all internet stocks were winners, of course, so to take a snapshot of a moment in time, in June of 1999, 32% of the internet companies that had IPOed that year were trading below their initial offer price. For every Healthion that was up 892% in just four months as a public company, there were plenty of stocks like FashionMall.com that were down 46% in barely three weeks on the markets. But then again, look at those odds. If every Internet stock was a potential lottery ticket, and if two-thirds of them seemed to be at least nominally winners,

in some capacity, then there was no reason not to take a gamble, really. If there was a hiccup in the market overall, or if your favorite stock in particular was cut in half in a number of weeks, well, that was just a buying opportunity, wasn't it? A chance to get more shares on the cheap. So, small investors began to buy internet stocks, and they didn't sell. If you just held fast and promised yourself you were sticking it out for the long term, You'd thank yourself later. That's what all the gurus told you, right? Buy and hold and invest for the long term. That was the mantra.

Everyone was telling Americans that stocks were sure things, given a long enough time horizon, of course. And in the late 90s, your time horizon really only needed to be a couple of weeks before that 30% loss might turn into a 60% gain. Just as the 1987 crash had been papered over with fresh gains in a matter of months, In the 90s, it seemed like every time the market seized up, those losses would be turned back into gains in no time. Internet stocks were particularly susceptible to speculation for a couple of reasons. First, there was that ingrained belief that potential on the internet was boundless. The dot-com that promised to bring used car buying to the web, well, it also had the potential, at least,

to take over all of automotive retail. That dot com that wanted to be the Amazon.com of toys? Well, look at how well Amazon was doing with books. Dot com companies were young companies. They were going public sometimes only months after their creation. And so, when these young companies showed any sign of growth, their stock prices tended to take off because it only seemed to validate the notion that there was more growth.

ahead. And it was this limitless promise that led to the second feature that was unique to internet stocks. Profits didn't matter. Valuations weren't tied to things like, you know, income. They were tied to potential fortunes that were going to be made somewhere in the future. Potential fortunes, potential profits one day, someday soon, when the internet had taken over the world, of course. And because stocks were being priced on the hypothetical, plenty of new metrics were trotted out to justify valuations. A stock like Amazon might jump because the company announced it was getting into music retail, say, or Yahoo might jump because it announced it had increased its monthly page view numbers by X percentage points. New metrics like counting

eyeballs and mind share were now used to show that companies were growing, even if that growth couldn't actually be measured in dollars and cents. Heck, sometimes a dot-com stock would increase in value even after it announced losses. Investors at the time might take that as a sign that the company was wisely plowing its money into strategies for growing at all costs. Average Americans believed all of this, believed in this growth mania, believed in this stock euphoria because all of the so-called efforts were telling them that it was true, it was rational. This time it's different, they would say.

Magazines like Wired were promoting a glittering future where technology would soon be a panacea for all of mankind's ills. Books like Ray Kurzweil's The Age of Spiritual Machines promise that technology might help us even transcend death sometime soon. Bestsellers like The Long Boom and Dow 36,000 made the argument that technological advances were enabling a structural shift that would kick the global economy into a new, higher gear, almost unfathomable to contemporary minds. investors were told they would look backwards on the dot-com era as being akin to the dawn of the industrial revolution or the beginning of electrification or the beginning of computing you'd kick yourself in 2030 if you hadn't been smart enough to invest in this new boom early on these two arguments that technology was changing the game and that investment markets overall were being transformed, fused until they were almost one and the same, a single, two-sided,

self-reinforcing battle cry. This wasn't a bubble, books like Dow 36,000 argued to its readers. Stocks weren't overvalued. They were undervalued. Prices were actually too low, Dow 36,000 promised, on its inside cover flap, quote, because investors and Wall Street have been looking at stocks the wrong way at valuation levels of the past, end quote. Dow 36,000 literally implored its readers, quote, astounding profits can be made, but the time to act is now, end quote. All of this whipping up of idealistic hysteria found a willing accomplice in the financial press.

On television, the gyrations and permutations of the boom were given literal play-by-play treatment by the channel that made its reputation during the late 1990s. In the early part of the 90s, CNBC had been an unprofitable, poorly watched channel on deep cable, the dorky, boring relation to CNN. But in late 1993, a man by the name of Roger Ailes, took over the channel and transformed it. Taking his cue from the way that ESPN covered sports, especially with its analyst banter, sideline reporting, and its Sports Center franchise, Ailes began populating CNBC with winning personalities who covered the stock market the way a sports anchor might cover a bowl game. Maria Bartaromo is termed the Money Honey, as she

breathlessly reported hourly from the floor of the New York Stock Exchange. Mark Haynes, Ron Ensana, Joe the Big Cahuna Kernan, and David the Brain Faber, they became your buddies on Squackbox as they covered the opening bell. There was a literal halftime show called Power Lunch, as well as a myriad of wrap-up and analysis shows after the closing bell. And all through the day, a parade of talking heads from Wall Street came on to analyze fluctuations in the the market, debate the relative merits of this company or that CEO, or just flat out talk their book in Wall Street lingo, making an argument for why investors should be long this stock or short that one, even if the one suggesting that they do so might own or be short the stock themselves.

Today, we're used to cable news being a day-long parade of talking heads, debating topics in Brady Bunch-style boxes. But before Roger Ailes took this format to Fox News, and it became the standard operating procedure on cable news everywhere, the free-for-all gab-fest format first found its success on CNBC. By the turn of the century, CNBC had become the background noise for a particular American moment, the default channel of the bubble era. It was, quote, an authentic cultural phenomenon, as Fast Company magazine described it, quote, broadcasts to nursing homes, yuppie gyms, dorm rooms, hotel lobbies, pilot ready rooms, and restaurants, end quote, so that Americans could get a quick update on their favorite stock or the hot new IPO that was hitting the market. CNBC cheerleaded for the bull market, but it also owed its eventual success to the bulls as well. During Ailes' first year at CNBC, revenues increased 50% and profits tripled.

From 1995 to early 2000, viewership had tripled as well, and by 1999, the channel was gushing more than $200 million a year onto parent company NBC's bottom line. people at the time felt that CNBC was the most visible aspect of an overall democratization of investing. As CNBC's Maria Bartaromo asked when she was asked to define her role to everyday investors, quote, why can't Joe Smith, who works at a deli have the same information as Joe Smith who works at an investment bank? That's why it's a bull market. it's not a professional's game anymore, end quote. Years later, Maggie Mayhar would concur.

Quote, it was in the last five years of the 90s that you saw the individual investor really take over. They were leading the market, because they were doing a lot of the buying, end quote. Indeed, the numbers bear this out. In a 2002 study, 40% of investors with financial assets of 25% of $25,000,000. to 99,000 reported that they made their first ever stock purchase after January of 1996. Among investors with less than 25,000 in assets, the percentage was 68%. Small investors were doing a lot of the buying in the late 90s because they were, of course, running their own 401K plans. And they were doing a lot of the buying because online trading platforms

like e-trade, Ameritrade, First Trade, Schwab, etc. By the late 1990s, the number of online brokerage firms was nearing 150, and everyday Americans were making half a million online trades every single day. If someone happened to fall in love with one of the hot internet stocks that they saw being pimped on CNBC, there was no longer any middleman left to talk them out of it. Americans had fired their brokers. By 1999, nearly 40% of retail security trades were being done online. So if Joe Smith saw a stock like Likos profiled on CNBC, he could jump online and place an order for LICO stock within minutes.

And if Mr. Smith wanted to spend his days discussing the relative merits and the future prospects of Likos, he could do so on message boards like Yahoo Finance and the many thousands of other forums that were devoted to discussing individual stocks. Often, the readership of these message boards would break down between bulls and bears or longs and shorts. Today, of course, we're all familiar with the Roman Coliseum-like combat that goes on in the comment sections of your average blog or the pages of a site like Reddit, but it was in the late 90s that average Americans became familiar with internet conventions such as flame wars and trolls on the stock market focused pages of a site like Motley Fool.

Partially from these message boards, an entire subculture of so-called day traders sprang up to take advantage of the wild swings of the market as, say, a stock like broadcast.com would shoot up several points in an afternoon, if user numbers happen to be good, or plummet, in a similar time frame if an analyst released a bearish report on the company. Because even in the midst of the euphoria, not everyone was bullish, even on Wall Street. It was just that over the course of the great dot-com bubble, the bearish voices were increasingly being drowned out. In December of 1998, a 33-year-old stock market analyst by the name of Henry Blodgett was working for the investment bank C-IBC Oppenheimer.

Oppenheimer was not a particularly prominent player on Wall Street, and Blodgett was not a particularly important analyst. He had basically lucked into the job less than three years previously because investment banks were desperate to find someone young who understood this new internet thing. Well aware of his inexperience, Blodgett's main interest that December was some version of faking it until he made it. Quote, not being blown out of the water, keeping the job, he would recall later. Two months earlier, Blodgett had published his first analyst report on Amazon.

He had recommended buying the stock, setting a one-year price target of $150 a share. And this was a good call. At the time of Blodgett's first recommendation, Amazon had been trading at $80 a share. It subsequently exploded to $240. And so, since that first recommendation was now out of date, the Oppenheimer sales team wanted a new recommendation to take to their clients for the new year. At their behest, Lodgett dutifully calculated that a 70% rise over the course of the next year might make sense based on Amazon's recent sales growth.

So he put a new price target on the stock, $400 a share, writing that, quote, Amazon's valuation is clearly more art than science, and we believe that the stock will continue to be driven higher in large part by the company's astounding revenue momentum. End quote. At the same time, a far more experienced analyst covering Amazon was Jonathan Cohen. Cohen worked for a more prominent firm, Merrill Lynch, and unlike Blodgett, Cohen's analysis was widely followed. Cohen had actually downgraded his recommendation of Amazon to reduce a few months.

previously, saying that the stock was too expensive. More precisely, Cohen would later famously call Amazon, quote, probably the single most expensive piece of equity ever, not just for Internet stocks, but for any stock in the history of modern equity markets, end quote. Cohen's price target for Amazon was $50 a share. So Henry Blodgett was going out on a limb by making such a wildly divergent call from the more experienced Coens.

When Blodgett circulated his numbers internally, quote, one of my bosses stopped by my office and sort of raised his eyebrows. $400 a share? The next day when the call went public, Blodgett would remember, quote, my phone lit up like a Christmas tree.

I thought, oh no, I blew it. Far from blowing it, the Amazon call made Blodgett's career. Blodgett had made his famous forecast of Amazon 400 on December 16, 1998. The stock closed up 20% on that day alone, in no small part thanks to news of Blodgett's recommendation. But by January 6th, not even a month later, Amazon stock blew clean past Blodget's $400 target. Almost overnight, Blodgett became a regular on CNBC, commiserating with the guys on Swackbox. He began to be regularly quoted and profiled in almost every newspaper and financial magazine in the country.

Amazon had gone from $80 to $400 a share in less than six months, and the so-called genius that seemed to see this coming was Henry Blodgett. In a matter of months, Blodgett was Blodgett. from an obscure analyst into a virtual rock star. A month later, when Jonathan Cohen left Merrill Lynch, coincidentally, Blodgett took over Cohen's analyst chair at the more prestigious firm. By 2001, Blodgett would be paid a rumored $12 million a year for his stock analysis, and Jonathan Cohen was in Nowheresville. The experience of Jonathan Cohen was not unique on Wall Street.

Hedge fund managers, mutual fund managers, stock analysts, even financial reporters learned and internalized a sharp lesson in the late 90s. People simply didn't want to hear negativity. It was far more helpful to your career if you joined the Hosanna Chorus talking up the prospects of the soaring stock market. and this went for everyone involved in the markets. Fund managers that did not fill their holdings with hot technology stocks saw their fund returns trail those of their peers and even the market indexes.

One by one, bearish stock market analysts that for years had been saying the bull market was too good to last, threw in the towel and got with the program. As Barton Biggs, a longtime money manager who was notoriously skeptical of technology stocks said, quote, everyone is tired of being bearish and being wrong. Now one of the most famous technology stock boosters, Henry Blodgett joined a pantheon of Wall Street soothsayers that were almost ubiquitous in the late 1990s. Analysts like Ralph Accompora, Jack Grubman, and especially Mary Moore, Meeker and Abby Joseph Cohen. All of them attained a level of fame and influence that

stock analysts had never enjoyed previously. Their slightest utterance could move markets, and all of them, at least most of the time, were fully committed bulls, staking their reputations on the growth prospects of the stock market generally and internet companies especially. Mary Meeker worked for Morgan Stanley, where she had an insider's view of the Netscape IPO. Shortly after, Meeker began to produce her yearly The Internet Report that analyzed larger trends in the overall Internet space. When it was published as a book, the Internet report became an unlikely bestseller. Meeker was tireless in her early promotion of tech stocks like America Online, Dell, and Cisco Systems.

Barron's magazine eventually dubbed her the queen of the net for her stock prognostications. She wrote in one of her research reports, quote, The world has never experienced as rapid-slash-violent a commercial evolution of a fundamental business change that being caused by the acceptance usage of the internet as a communications and commerce tool. Abby Joseph Cohen was the chair of investment strategy at Goldman Sachs. Over the course of the 1990s, she became one of the more famous proponents

of the concept of the new economy, the idea that American commerce and economics were undergoing a fundamental structural shift that ultimately justified the stock market's run-up. Part of this was due to the unique mixture of low inflation, low unemployment, and a shrinking budget deficit that the Clinton years had ushered in, what some called the Goldilocks economy. But more than that, Abby Joseph Cohen argued that the fundamental changes wrought by technology

itself were also responsible for creating structural improvements to the very way that the economy functioned. Technology was simply making Americans more productive, and therefore it was creating greater capacity in the economy for profits. Cohen told a reporter, by way of making her case, quote, take a look at Goldman Sachs, for example. We have invested heavily in sophisticated voicemail systems and word processing systems and so on, I know that the productivity of the technical staff is multiples of what it used to be. I just know that to be the case, but it doesn't get measured anyplace, end quote. This was not an unusual argument. Economists of all stripes were looking for a justification, a rationale, or anything that could explain the boom times that they

felt certain they were living in. Most just instinctively credited information technology. After all, everything was being connected. The world was shrinking and computers were everywhere. Surely that meant that things were functioning better, more efficiently, more profitably. The only problem was none of this seemed to show up in any of the official numbers. Economic output is easy to measure once you can count

widgets coming off an assembly line, but when your economic revolution is built around thoughts and ideas and the speedy new ways that you're connecting them together, how do you quantify the value of those innovations? ATMs might mean fewer bank tellers had jobs, but think of the time saved by millions of consumers. How did one measure that? Heck, Moore's Law itself might be muddying the waters. A computer in 1999 could be three times faster and therefore three times more productive than a computer from five years previous. But if the 1999 computer actually cost less than the 1994 computer, how would that show up as a negative contribution into the country's GDP growth? It was hard to make these numbers square. Fortune magazine opined in 1999 that, quote,

more and more value is produced not by real assets like factories and capital, but rather by people thinking and working together. And yet, while it seems obvious that computers have to have boosted productivity, proving that they have done so has been impossible, end quote. Many people came to believe that the proof might just be the soaring stock market itself. according to this line of thinking stocks and tech stocks especially were rising because investors were rationally pricing in the vast improvements and profits that technology was making possible. Stock markets are a forward-leaning indicator, of course, an indicator of economic trends, and so perhaps the market itself was revealing the profits and efficiencies that would show up in official figures sometime down the road.

One prominent economic expert that came to share this view was also the most important expert of them all. When Chairman of the Federal Reserve, Alan Greenspan, couldn't find the increases in productivity that he felt must be behind the run-up in stock prices, he commissioned Fed researchers to dig deeper into their statistical data in order to prove that productivity was, in fact, growing faster than the government numbers showed them to be. As one critic would later say, quote, Greenspan condoned the bubble and then concocted a theory as for why it was rational, end quote. Greenspan had actually begun the dot-com era,

skeptical of the stock markets euphoria. In December of 1996, the Fed chairman gave a speech to a conservative think tank, where a throwaway line in a wonky policy speech, which was, by the way, but how do we know when irrational exuberance had unduly escalated asset prices, briefly caused markets to seize up?

That phrase, irrational exuberance, would somewhat ironically become a cultural slogan of the whole dot-com era. But as the 90s wore on, Greenspan, if he did not exactly repudiate that irrational exuberance phrase, gave every indication to markets that he was no longer much worried about speculative excess. As early as July 1997, during one of his many appearances before Congress, Greenspan spoke of the potential for a, quote, once or twice a century phenomenon that will carry productivity trends nationally and globally to a new higher track.

What we may be observing in the current environment is a number of key technologies, some even mature, finally interacting to create significant new opportunities for value creation, end quote. In January of 1999, a senator asked Greenspan how much of the run-up in stocks was, quote, based on fundamentals and how much is based on hype. Greenspan answered, quote, you won't get hype working if there weren't something fundamentally potentially sound under it, end quote. He would later tell President Clinton in person,

quote, this is the best economy I've ever seen in 50 years of studying it every day. To many people in the late 90s, Alan Greenspan came to be seen as both the protector of the boom and perhaps it's very architect. Green Span was by far the most famous and revered Fed Chairman to ever hold the title. His every utterance was parsed for clues to his thinking, and his every pronouncement cheered for its wisdom.

And in fact, it was his distinct lack of discouraging words concerning the stock markets mania that, in many people's minds, tacitly allowed the bubble to inflate in the first place. The chairperson of the Federal Reserve has a famous dual mandate to curb inflation and promote maximal levels of employment. But the Fed can also exercise a fair degree of leverage over the stock market's performance generally. Because the Fed has the power to set interest rates, if the Fed increases rates, it can make bonds a more attractive option to investors than stocks. and higher interest rates also mean higher borrowing costs for companies which can depress earnings and thereby lower the performance of public corporations on public markets, eventually cooling off soaring stock prices.

But in the nearly two years after the irrational exuberance speech, the Federal Reserve raised interest rates only once and in fact cut interest rates several times in response to the various mid-90s crises mentioned earlier. So from late 96 until late 1999, just at the time when the dot-com bubble was inflating, Greenspan basically sat on his hands. The Fed was, to borrow from Wall Street lingo, extremely accommodating to the stock market during the dot-com era. And it was this perceived or actual accommodation that many in the stock market put their faith in. Back in his first year as chairman, Greenspan had reacted to

1987's Black Monday crash by lowering interest rates and flooding financial markets with easy cash and credit in order to avert a depression. In doing so, Greenspan established a game plan that he would return to again and again throughout the late 90s. Every time a crisis like the Asia flu happened and threatened to pull the rug out from under the bull market, Greenspan would simply lower interest rates and seemingly the crisis was averted. After one such intervention, Goldman Sachs chief economist declared joyfully, quote, the lifeguard is back on duty. You can go back to the pool.

Another Wall Street veteran from this period would recall, quote, we used to call him Uncle Allen. We would say Uncle Allen will take care of. us, many people, then and now, feel that Greenspan, at the very least, enabled the dot-com's speculative stock market bubble. At the time, American investors came to believe very strongly that Greenspan wanted them to be rich, and if anything happened to go wrong, Uncle Alan would just put his finger on the scales and make things right. Whether intentionally or not, Greenspan became the indispensable man of the bubble era. During the run-up to the 2000 election, presidential candidate John McCain vowed, quote, and by the way, I would not only reappoint Alan Greenspan,

if he were to happen to die, God forbid, I would do like they did in the movie Weekend at Bernies. I would prop him up and put a pair of dark sunglasses on it, end quote. In the words of James Grant, editor of Grant's interest rate observer, writing in 1996, quote, The stock market is not the kind of game in which one party loses what another party wins. It's the kind of game in which over certain periods of time, nearly everyone may win, or nearly everyone may lose. By the late 1990s, seemingly everyone involved in the stock market was winning. and the coming of the dot-com stocks only seemed to extend this winning streak.

The banks were raking in huge fees for bringing young internet companies public. Venture capital firms were making quick fortunes by funding dot-com companies and bringing them public only a short time later. Some heavily technology-focused VC firms were reportedly earning an estimated 100 or 200% annually and nobody had any vested interest in questioning this madness, least of all the media. As early as 1997, an estimated 30% of national newspaper ad revenues came from the financial services industry. By 1999, ad rates on cable television were up 21% year over year and 16% on network television, thanks to an estimated $1.9 billion that young.com companies would spend in an effort to promote themselves.

Most importantly, all of those baby boomers, all of those CNBC addicts, all of those everyday Americans who were invested in the stock market, they were making money too. If they were invested in the right internet stocks, they were making a lot of money. So almost nobody was interested in hearing anything other than good news about stocks, about technology, about the economy in general. It was almost as if the dot-coms hadn't happened, someone would have had to invent them just to keep the party going. If the dot-com bubble is remembered mainly for the initial public offerings of stock that made all the headlines,

it's important to remember that the actual dot-com mania, as measured by high-profile Internet IPOs coming to market, actually happened in a relatively brief window of time. In the year 1995, seven stocks IPOed that could be termed internet companies. In 1996, there were 27. In 1997, the first of the real dot-coms came to market, but even then they only totaled 19. In 1998, there were 29 Internet IPOs.

but in 1999, there were 249. And those were just the internet companies that debuted on the stock market. There were untold others that either got acquired or launched and went nowhere or launched and quietly did middlingly. In all of 1995, there had been a total of $814 million of venture capital money invested in fledgling internet companies. But by the first six months of 1990, alone, that number had ballooned from 814 million to 6.3 billion, seeding all of the hundreds,

perhaps thousands of startups that would be called dot-coms. Of course, all of these companies couldn't be winners. It was perhaps inevitable that toward the tail end of the dot-com bubble, there were quite a lot of young internet companies being founded that had questionable business plans at best. Some of the companies were so flimsy as to be just short of outright fraud. The reason that a lot of these companies could exist at all was that investors, both venture capitalists and the public at large, no longer had any interest in discerning true value. A company with a dot-com at the end of its name might be the next billion-dollar winner. As the eternally skeptical Barton Biggs said as early as 1996, quote,

you've got stocks selling at absolutely unbelievable multiples of earnings and revenues. You've got companies going public that don't even have earnings. You've got people setting up Internet pages to reinforce each other's convictions in these wildly speculative stocks, end quote. By the end of the decade, such chicken little cries seemed quaint. If Americans, especially the everyday Americans who were in no way financial professionals but were suddenly driving the market, were demanding to invest in Internet companies, well, Silicon Valley and Wall Street were more than happy to supply the demand. And with every new company that enjoyed a 100% first day pop on the markets, the increasingly isolated voices that were urging caution seemed to, all the more discredited. A well-respected, long-time stock market insider

weighed in at the tail end of 1998 saying, quote, it defies my imagination that so many people with so little sophistication are speculating on these stocks, end quote. The man speaking those words was one, Bernie Madoff. If this is the first time you're listening to this podcast, please subscribe to us on your podcast app of choice. There's plenty more great internet history where that came from.

And if you're a long-time listener, then you know what to do to help us out. Rate and review us on iTunes. Because iTunes gives credit to reviews and ratings, and the more great reviews we get, the more people will discover us. As always, there's more info on our website, www.com, the show's Twitter handle is at NetHistoryPod, and my personal Twitter is at Brian MCC. Thanks for listening.