What Caused The Dot Com Crash?

I typed that, “What caused the dot com crash?” into a search engine and a link to Quora came out that had the following image.

The Barron’s article discusses how the only way to truly evaluate a company with insane valuation was to understand the “burn rate” of money and figure out when a company would go under if it didn’t receive more capital infusions, get bought out or go bankrupt.

Some of us at Econonaut lived through the dot com crash and I am happy to admit that I came out relatively unscathed. I did lose a small amount of money on Worldcom thinking it would come back out of bankruptcy but I knew it was a gamble and wasn’t too sad to lose out on a small sum of money.

We decided to write this article because we are now in a bubble much larger than the dot com, many call it the mother of all bubbles or “the everything bubble” where not only are stocks overvalued but housing, oil, gold, digital currencies, and pretty much anything else that can be invested in even non-fungible tokens.

This begs a question: How do we determine when the bubble will pop all over again?

Do we have a metric for a burn rate of housing? gold? oil? stocks? The Federal Reserve’s seemingly infinitely cheap money has now been causing rapid global inflation growth over over a year with “transitory” a long forgotten adjective spoken almost two years ago.

To try to find an answer we typed “what are the most overvalued stocks?” and we got an article from Investors that listed some stocks that have astronomical hopes for future business but we didn’t see the “burn rate” problem anywhere that we could tell.

So if the “burn rate” isn’t going to be a tell, the when will? What about the end of cheap Federal Reserve money? What if the Fed raises rates?

According the this CNBC article, borrowing costs have already started to rise despite the Federal Reserve making a decision to keep rates unchanged at their last FOMC meeting. If borrowing costs do continue to rise, it will certainly have an impact on housing but will it impact stocks, digital currencies and the other speculative investments?

What are other potential catalysts?

War – China invading Taiwan would present significant disruptions to supply chains. Russia invading Ukraine would also cause geo-political instability across Europe.

Terrorism – Another 9/11 style attack on US soil would certainly cause panic in the markets.

Pandemic – A resurgence or mutation of a deadlier form of Covid could send consumption shock waves throughout global markets.

Inflation – Could we be entering a period of sky rocketing costs for all goods and services that lasts years? If so, this could very well be the proverbial straw that breaks the camels back. Will the cost of health insurance, medical care, education and other things reach a point of non-sustainability?

Boomers – Will boomers retiring from the work force and entering the social systems of medicare and social security overwhelm the US Treasury?

What are the probabilities of these events happening? Given the aging demographic issues both Russia and China have it wouldn’t make too much sense for these countries to engage in a long war of attrition with various counter parties.

Terrorism is always a risk but 9/11 is now 20 years behind us and we haven’t had another attack since and the intelligence community has improved dramatically since then.

The covid pandemic seems to be coming under control which leaves us with the remaining two narratives: inflation and boomers. Will this assessment hold true? We’re crunching away at some of the boomer numbers to try to find out and we continue to monitor inflation. Stay tuned!