WEBVTT 00:00:00.000 --> 00:00:02.600 Imagine you're standing there watching a city 00:00:02.600 --> 00:00:05.309 being built and fast forward. Okay I can picture 00:00:05.309 --> 00:00:08.009 that. Yeah so these massive skyscrapers made 00:00:08.009 --> 00:00:10.970 of gleaming glass are just like shooting up into 00:00:10.970 --> 00:00:14.390 the sky and everyone around you is rushing fighting 00:00:14.390 --> 00:00:18.050 and paying absolute top dollar to buy the penthouses 00:00:18.050 --> 00:00:20.230 in these buildings before the paint is even dry. 00:00:20.449 --> 00:00:23.350 Right but the catch is I mean the wild part is 00:00:23.350 --> 00:00:25.410 that nobody is actually pouring concrete for 00:00:25.410 --> 00:00:27.550 the foundations. Exactly. The developers are 00:00:27.550 --> 00:00:29.730 just you know stacking the glass higher and higher 00:00:29.730 --> 00:00:31.670 genuinely hoping the clouds will just hold it 00:00:31.670 --> 00:00:33.710 up. And if you point out the lack of a foundation 00:00:33.710 --> 00:00:36.170 people don't call you cautious. They call you 00:00:36.170 --> 00:00:38.990 crazy. They tell you that gravity simply doesn't 00:00:38.990 --> 00:00:41.170 apply anymore. That we're in an entirely new 00:00:41.170 --> 00:00:44.030 paradigm, right? Right. And welcome to The Deep 00:00:44.030 --> 00:00:46.670 Dive. I'm your host. And today we are opening 00:00:46.670 --> 00:00:49.909 the Wikipedia archives to figure out how a collective 00:00:49.909 --> 00:00:52.670 financial delusion actually built the modern 00:00:52.670 --> 00:00:55.850 internet. I'm the resident expert here. And yeah, 00:00:55.950 --> 00:00:58.560 we are exploring the dot com bubble today. Our 00:00:58.560 --> 00:01:01.100 mission is to understand the mechanics of this 00:01:01.100 --> 00:01:04.219 late 90s tech frenzy to, you know, look past 00:01:04.219 --> 00:01:07.159 the staggering five trillion dollar crash and 00:01:07.159 --> 00:01:09.819 uncover what this historical moment teaches you 00:01:09.819 --> 00:01:12.959 about information overload, hype and human psychology. 00:01:14.000 --> 00:01:16.840 So, OK, let's unpack this. Set the baseline for 00:01:16.840 --> 00:01:19.200 the scale of this glass city. Sure. So to give 00:01:19.200 --> 00:01:21.540 you the bird's eye view between 1995 and its 00:01:21.540 --> 00:01:24.719 peak in March 2000, the Nasdaq Composite Index, 00:01:24.780 --> 00:01:26.500 which was heavily weighted toward tech companies. 00:01:26.659 --> 00:01:30.750 Right. Exactly. Heavily. That index rose by 400%. 00:01:30.750 --> 00:01:33.209 I mean, five years of absolute parabolic growth. 00:01:34.129 --> 00:01:37.750 400%. That's just wild. It is. But then, by October 00:01:37.750 --> 00:01:40.849 2002, it had lost 78 % of its value. It gave 00:01:40.849 --> 00:01:42.689 up essentially all of the gains it made during 00:01:42.689 --> 00:01:45.469 the entire bubble. Ouch. Yeah. But if we connect 00:01:45.469 --> 00:01:47.870 this to the bigger picture, this actually mirrors 00:01:47.870 --> 00:01:50.450 other massive technology -inspired booms. We 00:01:50.450 --> 00:01:52.450 saw the exact same psychological patterns with 00:01:52.450 --> 00:01:56.170 the railroads in the 1840s or automobiles in 00:01:56.170 --> 00:01:59.450 the 1900s. and radio in the 1920s. So a truly 00:01:59.450 --> 00:02:01.709 revolutionary technology arrives, and the promise 00:02:01.709 --> 00:02:04.310 of this frictionless future just sparks a speculative 00:02:04.310 --> 00:02:06.989 frenzy. Precisely. It's not an isolated event 00:02:06.989 --> 00:02:09.550 at all. OK, so the technological spark for the 00:02:09.550 --> 00:02:12.930 1990s is clearly the 1993 release of the Mosaic 00:02:12.930 --> 00:02:16.650 web browser. Because before Mosaic, the internet 00:02:16.650 --> 00:02:21.050 was this sterile text -based terminal, mostly 00:02:21.050 --> 00:02:23.210 used by academics or the military. Right, you 00:02:23.210 --> 00:02:25.310 had to know command lines just to use it. Exactly. 00:02:25.680 --> 00:02:28.979 But Mosaic made the World Wide Web visual. You 00:02:28.979 --> 00:02:31.860 could actually navigate it. And suddenly the 00:02:31.860 --> 00:02:34.300 adoption rate just goes exponential. It went 00:02:34.300 --> 00:02:37.080 from a luxury to a necessity. Yeah. I mean, between 00:02:37.080 --> 00:02:40.159 1990 and 1997, the percentage of households in 00:02:40.159 --> 00:02:42.659 the U .S. owning computers jumped from 15 percent 00:02:42.659 --> 00:02:45.819 to 35 percent. The PC transformed into a standard 00:02:45.819 --> 00:02:48.280 household appliance. But here's the thing. A 00:02:48.280 --> 00:02:50.659 technological spark isn't enough to build a five 00:02:50.659 --> 00:02:53.360 trillion dollar bubble on its own. You need financial 00:02:53.360 --> 00:02:55.210 fuel. The macroeconomic conditions. That's right. 00:02:55.409 --> 00:02:57.430 Exactly. The economic backdrop of the mid to 00:02:57.430 --> 00:03:00.270 late 1990s provided the absolute perfect conditions 00:03:00.270 --> 00:03:02.389 for a mania. Interest rates were dropping. And 00:03:02.389 --> 00:03:04.669 when borrowing becomes cheap. Right. When the 00:03:04.669 --> 00:03:06.789 cost of borrowing money becomes incredibly cheap, 00:03:07.430 --> 00:03:09.750 keeping your capital in a traditional safe savings 00:03:09.750 --> 00:03:13.210 account doesn't yield much return. Capital gets 00:03:13.210 --> 00:03:15.909 bored. Bored capital. I like that. Yeah. It starts 00:03:15.909 --> 00:03:19.050 flowing outward along the risk spectrum, basically 00:03:19.050 --> 00:03:21.370 hunting for higher returns. It sounds like pouring 00:03:21.370 --> 00:03:24.460 gasoline on a campfire. You have this incredibly 00:03:24.460 --> 00:03:28.419 cool new tool, the internet, but then the government 00:03:28.419 --> 00:03:30.659 and the Federal Reserve essentially hand everyone 00:03:30.659 --> 00:03:32.879 free matches. That's a great way to put it. Because 00:03:32.879 --> 00:03:35.099 on top of the low interest rates, you get the 00:03:35.099 --> 00:03:39.099 Taxpayer Relief Act of 1997, which actively lowered 00:03:39.099 --> 00:03:42.240 the top marginal capital gains tax. So the government 00:03:42.240 --> 00:03:44.699 is explicitly saying, you know, if you roll the 00:03:44.699 --> 00:03:46.939 dice on these exciting new internet startups 00:03:46.939 --> 00:03:49.800 and win, will take a smaller cut of your winnings. 00:03:50.400 --> 00:03:52.780 Exactly. They actively incentivize the speculation. 00:03:53.099 --> 00:03:54.900 And Alan Greenspan, the Federal Reserve chair 00:03:54.900 --> 00:03:57.360 at the time, is noted in the sources for putting 00:03:57.360 --> 00:04:00.379 a distinctly positive spin on these sky -high 00:04:00.379 --> 00:04:03.840 stock valuations. His cheerleading totally validated 00:04:03.840 --> 00:04:06.120 the market's behavior. What's fascinating here 00:04:06.120 --> 00:04:08.759 is how the sheer velocity of the market completely 00:04:08.759 --> 00:04:11.060 broke the traditional ways Wall Street measured 00:04:11.060 --> 00:04:13.520 a company's worth. They just threw the old rule 00:04:13.520 --> 00:04:16.500 book out the window. Totally. Investors typically 00:04:16.500 --> 00:04:20.019 look at the price earnings ratio, or P -E ratio, 00:04:20.519 --> 00:04:23.199 to determine if a stock is overvalued relative 00:04:23.199 --> 00:04:25.639 to its actual profits. Right, comparing the stock 00:04:25.639 --> 00:04:27.879 price to the actual money the company makes. 00:04:28.100 --> 00:04:30.860 Yeah. And a healthy, fast -growing company might 00:04:30.860 --> 00:04:34.550 trade at a P -E ratio of maybe 20 or 25. But 00:04:34.550 --> 00:04:36.930 during the height of the dot -com bubble, the 00:04:36.930 --> 00:04:40.310 Nasdaq reached an aggregate P -E ratio of 200. 00:04:40.370 --> 00:04:43.290 Wait, 200? 200. To put that in perspective for 00:04:43.290 --> 00:04:46.029 you listening, during the infamous Japanese asset 00:04:46.029 --> 00:04:49.230 price bubble in 1991, which is widely considered 00:04:49.230 --> 00:04:51.490 one of the most extreme financial distortions 00:04:51.490 --> 00:04:53.350 in modern history. Oh yeah, a massive bubble. 00:04:53.610 --> 00:04:57.149 The Niki index hit a peak P -E ratio of 80. So 00:04:57.149 --> 00:04:59.110 dot -com bubble made the greatest historical 00:04:59.110 --> 00:05:02.540 asset bubbles look like conservative. Wall Street 00:05:02.540 --> 00:05:04.699 essentially had to invent a new financial gravity 00:05:04.699 --> 00:05:07.060 to justify the math. And that new gravity was 00:05:07.060 --> 00:05:09.300 built entirely around buzzwords like network 00:05:09.300 --> 00:05:12.800 effects and capturing mindshare. Mindshare. That 00:05:12.800 --> 00:05:16.240 is such a 90s corporate buzzword. It really is. 00:05:17.079 --> 00:05:19.959 But the core logic, which actually proved true 00:05:19.959 --> 00:05:22.100 for later monopolies like Google on Facebook, 00:05:22.879 --> 00:05:24.790 was that on the internet, The company with the 00:05:24.790 --> 00:05:28.029 biggest audience wins everything. So scale was 00:05:28.029 --> 00:05:30.870 the only moat. Exactly. So these early dot -com 00:05:30.870 --> 00:05:34.410 companies would operate at massive planned net 00:05:34.410 --> 00:05:37.550 operating losses. They would offer their services 00:05:37.550 --> 00:05:40.569 or physical products for free or at a deep discount. 00:05:40.750 --> 00:05:43.009 Just to get you in the door. Right. Operating 00:05:43.009 --> 00:05:44.730 under the assumption that if they captured enough 00:05:44.730 --> 00:05:46.449 brand awareness, they could just flip a switch 00:05:46.449 --> 00:05:48.769 and charge profitable rates once they own the 00:05:48.769 --> 00:05:51.220 market. Get big fast and get large or get lost. 00:05:51.439 --> 00:05:53.980 Those were the actual mantras. I love this detail 00:05:53.980 --> 00:05:55.879 from the source material. A Wall Street Journal 00:05:55.879 --> 00:05:58.439 article actually suggested that investors should 00:05:58.439 --> 00:06:01.500 rethink the, quote, quaint idea of profits. The 00:06:01.500 --> 00:06:03.720 quaint idea of profits. Unbelievable. Right. 00:06:03.939 --> 00:06:05.980 If you aren't burdened by the quaint idea of 00:06:05.980 --> 00:06:08.910 making money, your only job is marketing. This 00:06:08.910 --> 00:06:11.350 is the era of the Pets .com sock puppet. Oh, 00:06:11.509 --> 00:06:14.689 the sock puppet. Iconic. Companies with zero 00:06:14.689 --> 00:06:17.649 revenue were throwing multi -million dollar dot 00:06:17.649 --> 00:06:20.569 com parties just to launch a splash page on the 00:06:20.569 --> 00:06:24.029 web. And the cultural shift was just profound. 00:06:24.209 --> 00:06:26.730 It wasn't just Wall Street anymore. No, CNBC 00:06:26.730 --> 00:06:29.250 began broadcasting daily stock movements with 00:06:29.250 --> 00:06:32.449 the same graphics, hype and suspense as a live 00:06:32.449 --> 00:06:35.259 sports event. everyday people were quitting their 00:06:35.259 --> 00:06:38.060 stable careers to become day traders, the feedback 00:06:38.060 --> 00:06:40.779 loop was just intoxicating. And looking at the 00:06:40.779 --> 00:06:44.160 raw data from 1999 totally explains that intoxication. 00:06:44.740 --> 00:06:47.560 In a single 12 month period, shares of the telecom 00:06:47.560 --> 00:06:52.220 company Qualcomm rose in value by 2619 percent. 00:06:52.360 --> 00:06:56.620 Over 2600 percent in one year. Yes. And 12 other 00:06:56.620 --> 00:06:59.240 large cap stocks, meaning massive established 00:06:59.240 --> 00:07:02.120 companies, not just tiny penny stocks, each rose 00:07:02.120 --> 00:07:04.560 over a thousand percent in value. The Nasdaq 00:07:04.560 --> 00:07:07.600 as a whole rose over 85 percent in 1999 alone. 00:07:07.879 --> 00:07:10.060 But with numbers that detached from reality the 00:07:10.060 --> 00:07:12.000 smart money had to know this was a house of cards. 00:07:12.180 --> 00:07:14.199 I mean someone looks at a company with zero revenue 00:07:14.199 --> 00:07:16.480 throwing million dollar parties and realizes 00:07:16.480 --> 00:07:18.860 the math ends in a brick wall. Oh absolutely. 00:07:19.019 --> 00:07:20.839 The smart money saw it coming. Mark Cuban is 00:07:20.839 --> 00:07:23.819 a prime example. Right. He was a hugely successful 00:07:23.819 --> 00:07:26.360 entrepreneur who sold his company broadcast dot 00:07:26.360 --> 00:07:29.889 com to Yahoo at the absolute peak. But the brilliant 00:07:29.889 --> 00:07:32.550 part is that he immediately hedged his massive 00:07:32.550 --> 00:07:36.069 Yahoo stock gains using complex financial instruments 00:07:36.069 --> 00:07:39.029 to protect his wealth before the inevitable crash. 00:07:39.389 --> 00:07:41.610 He locked in the upside but protected the downside. 00:07:41.730 --> 00:07:44.670 Exactly. And Sir John Templeton is another fascinating 00:07:44.670 --> 00:07:47.889 example of the smart money exploiting the delusion. 00:07:48.410 --> 00:07:51.310 He looked at the market, publicly called it temporary 00:07:51.310 --> 00:07:55.569 insanity and orchestrated a massive, highly specific 00:07:55.569 --> 00:07:58.180 short selling campaign. Templeton's strategy 00:07:58.180 --> 00:08:00.740 is brilliant because he didn't just blindly short 00:08:00.740 --> 00:08:04.180 the market, he targeted the expiration of lockup 00:08:04.180 --> 00:08:06.660 periods. Which is such a specific mechanism. 00:08:06.860 --> 00:08:08.980 It is. For you listening, a lockup period is 00:08:08.980 --> 00:08:10.920 a legal rule, stating that when a company goes 00:08:10.920 --> 00:08:13.319 public, the executives and early employees cannot 00:08:13.319 --> 00:08:15.540 sell their personal shares for a set amount of 00:08:15.540 --> 00:08:17.519 time. Usually six months. Usually six months, 00:08:17.560 --> 00:08:19.680 yeah. And Templeton realized that these insiders 00:08:19.680 --> 00:08:21.540 knew their companies were essentially worthless. 00:08:21.620 --> 00:08:22.939 They were just waiting for the clock to run out. 00:08:23.480 --> 00:08:25.699 Exactly. It's like knowing exactly what time 00:08:25.699 --> 00:08:28.250 the doors unlock. on Black Friday, and betting 00:08:28.250 --> 00:08:31.069 millions of dollars that the ensuing stampede 00:08:31.069 --> 00:08:33.789 of insiders rushing to cash out will break the 00:08:33.789 --> 00:08:36.330 store windows. That's a perfect analogy. He shorted 00:08:36.330 --> 00:08:38.529 the stocks right before those six -month windows 00:08:38.529 --> 00:08:40.990 expired, knowing the market would instantly flood 00:08:40.990 --> 00:08:43.509 with sell orders. Here's where it gets really 00:08:43.509 --> 00:08:45.350 interesting, though. It wasn't just predicting 00:08:45.350 --> 00:08:48.169 the market. It was predicting human nature. But 00:08:48.169 --> 00:08:50.029 what about the physical infrastructure? Was that 00:08:50.029 --> 00:08:52.769 all just vaporware, too? That's the crucial pivot 00:08:52.769 --> 00:08:55.470 here. Templeton was betting against the software 00:08:55.470 --> 00:08:58.429 and the consumer -facing websites. But the unseen 00:08:58.429 --> 00:09:01.970 foundation of this entire era, the physical infrastructure 00:09:01.970 --> 00:09:05.470 of the internet, was experiencing its own parallel 00:09:05.470 --> 00:09:08.370 bubble. The telecom bubble. Right. The telecommunications 00:09:08.370 --> 00:09:11.129 sector was arguably a more capital -intensive 00:09:11.129 --> 00:09:14.990 mania than the dotcoms. Prompted by the 1996 00:09:14.990 --> 00:09:17.710 Telecommunications Act, which deregulated the 00:09:17.710 --> 00:09:20.269 industry, telecom companies kicked off a global 00:09:20.269 --> 00:09:23.480 race to lay fiber optic cable. This is a massive 00:09:23.480 --> 00:09:26.120 piece of the puzzle because Pets .com is just 00:09:26.120 --> 00:09:28.519 code, but someone had to actually build the physical 00:09:28.519 --> 00:09:30.840 pipes that the internet flows through. Exactly. 00:09:31.179 --> 00:09:33.240 And these telecom equipment companies took on 00:09:33.240 --> 00:09:36.399 more than $500 billion in debt. They weren't 00:09:36.399 --> 00:09:38.919 just hiring programmers. They were buying fleets 00:09:38.919 --> 00:09:41.480 of trucks, tearing up sidewalks across the globe 00:09:41.480 --> 00:09:44.799 and laying millions of miles of dark fiber. $500 00:09:44.799 --> 00:09:47.679 billion in debt. That is staggering. And the 00:09:47.679 --> 00:09:49.840 speculation in the physical layer went even further. 00:09:50.500 --> 00:09:52.620 European governments realized they controlled 00:09:52.620 --> 00:09:56.860 a vital invisible resource, the 3G wireless spectrums 00:09:56.860 --> 00:09:59.240 required for mobile data. Oh, the spectrum auctions. 00:09:59.360 --> 00:10:01.919 Yes. They set up auctions for these radio frequencies. 00:10:02.159 --> 00:10:05.340 And the game theory here was brutal. If a major 00:10:05.340 --> 00:10:07.820 telecom company didn't win the spectrum, they 00:10:07.820 --> 00:10:10.000 would be totally obsolete in the mobile future. 00:10:10.120 --> 00:10:12.120 It was an existential threat for them. So they 00:10:12.120 --> 00:10:15.039 bid astronomical amounts of borrowed money. The 00:10:15.039 --> 00:10:18.549 UK auction raised 22 .5 billion pounds. The German 00:10:18.549 --> 00:10:20.889 auction raised 30 billion pounds. Just for the 00:10:20.889 --> 00:10:23.169 invisible airspace to broadcast signals. Exactly. 00:10:23.210 --> 00:10:25.289 But the underlying mechanism of this debt bomb 00:10:25.289 --> 00:10:27.750 was a total miscalculation of consumer demand. 00:10:28.389 --> 00:10:30.789 The telecom giants were building a 10 -lane physical 00:10:30.789 --> 00:10:34.450 superhighway of fiber optics. But in 1999, most 00:10:34.450 --> 00:10:37.230 consumers were still using slow dial -up modems. 00:10:37.549 --> 00:10:39.029 Right. There were only a few hundred cars on 00:10:39.029 --> 00:10:41.870 the road, so to speak. Exactly. When the financing 00:10:41.870 --> 00:10:44.529 eventually dried up, the high debt obligations 00:10:44.529 --> 00:10:46.950 couldn't be serviced by the non -existent customer 00:10:46.950 --> 00:10:49.889 base. Bond investors who financed this telecom 00:10:49.889 --> 00:10:52.330 infrastructure ultimately recovered just over 00:10:52.330 --> 00:10:55.169 20 % of their investments. The immense debt in 00:10:55.169 --> 00:10:57.909 telecom combined with the total lack of profits 00:10:57.909 --> 00:11:00.830 in the dot -coms created a highly combustible 00:11:00.830 --> 00:11:03.870 environment. A powder keg. A total powder keg. 00:11:04.230 --> 00:11:06.830 And the peak of the cultural hubris was arguably 00:11:06.830 --> 00:11:11.019 January 2000. Super Bowl 34 is historically remembered 00:11:11.019 --> 00:11:13.940 as the dot -com Super Bowl. Oh wow, yes. Between 00:11:13.940 --> 00:11:17.039 12 and 19 dot -com companies bought ad spots 00:11:17.039 --> 00:11:19.100 paying around two million dollars for just 30 00:11:19.100 --> 00:11:21.980 seconds of airtime. With no revenue to justify 00:11:21.980 --> 00:11:25.179 it. None at all. And simultaneously America Online 00:11:25.179 --> 00:11:27.639 announces its mammoth merger with Time Warner. 00:11:28.139 --> 00:11:30.460 which really represented the ultimate triumph 00:11:30.460 --> 00:11:33.860 of the, quote, new economy over the old economy. 00:11:34.120 --> 00:11:37.039 But the architecture of a crash is rarely a single 00:11:37.039 --> 00:11:39.600 catastrophic explosion. It's usually a series 00:11:39.600 --> 00:11:42.399 of cascading failures. And March 2000 is when 00:11:42.399 --> 00:11:44.480 the dominoes really begin to fall. OK, walk us 00:11:44.480 --> 00:11:46.879 through the timeline. So on Friday, March 10th, 00:11:46.980 --> 00:11:50.730 the NASDAQ reaches its peak of 5048. The very 00:11:50.730 --> 00:11:54.169 next Monday, March 13th, news breaks that Japan 00:11:54.169 --> 00:11:56.690 has entered a recession. Which might sound disconnected 00:11:56.690 --> 00:11:59.330 to a tech bubble in California. Right. But in 00:11:59.330 --> 00:12:01.690 a globalized financial system, a recession in 00:12:01.690 --> 00:12:04.769 Japan changes the mechanics of risk. Japanese 00:12:04.769 --> 00:12:07.559 banks pull back lending. Which means global hedge 00:12:07.559 --> 00:12:10.340 funds suddenly need liquidity and when hedge 00:12:10.340 --> 00:12:12.720 funds need to raise cash quickly They don't sell 00:12:12.720 --> 00:12:15.320 their safe slow -moving assets. They sell their 00:12:15.320 --> 00:12:18.580 most liquid highly speculative assets first exactly 00:12:18.580 --> 00:12:22.659 tech socks that macroeconomic fear in Asia Fundamentally 00:12:22.659 --> 00:12:25.059 shrinks the risk appetite in Silicon Valley and 00:12:25.059 --> 00:12:28.029 then exactly one week later on March 20th The 00:12:28.029 --> 00:12:30.590 financial magazine Barron's publishes a cover 00:12:30.590 --> 00:12:33.649 article titled Burning Up. A very literal title. 00:12:33.769 --> 00:12:35.450 Very literal. And this wasn't a philosophical 00:12:35.450 --> 00:12:37.970 critique. It was a forensic accounting exposure. 00:12:38.470 --> 00:12:40.929 The article bluntly warned that dozens of high 00:12:40.929 --> 00:12:42.690 flying Internet companies were going to run out 00:12:42.690 --> 00:12:44.870 of cash within months. And the timing was brutal 00:12:44.870 --> 00:12:47.730 because on that exact same day, a prominent tech 00:12:47.730 --> 00:12:50.289 company called MicroStrategy announces a revenue 00:12:50.289 --> 00:12:53.149 restatement. A restatement is never good news. 00:12:53.309 --> 00:12:56.529 Never. They basically admit their aggressive 00:12:56.529 --> 00:12:59.370 accounting practices had fabricated their previous 00:12:59.370 --> 00:13:02.950 profitability. Their stock price dropped 62 % 00:13:02.950 --> 00:13:06.549 in a single trading session. 62 % in one day. 00:13:06.909 --> 00:13:09.590 That restatement shatters the collective illusion. 00:13:10.429 --> 00:13:14.149 The market was operating entirely on faith. If 00:13:14.149 --> 00:13:16.950 one darling tech company is caught cooking the 00:13:16.950 --> 00:13:19.549 books to hide their lack of revenue, institutional 00:13:19.549 --> 00:13:22.169 investors immediately assume every other company 00:13:22.169 --> 00:13:24.450 is lying about their numbers, too. The faith 00:13:24.450 --> 00:13:27.029 just evaporates overnight. Then the Federal Reserve, 00:13:27.110 --> 00:13:29.509 the entity that handed out the matches earlier, 00:13:29.950 --> 00:13:31.990 decides to stomp on the fire. They raise interest 00:13:31.990 --> 00:13:34.649 rates. This is a crucial mechanical shift. It 00:13:34.649 --> 00:13:36.870 really is because it leads to an inverted yield 00:13:36.870 --> 00:13:39.309 curve. For you listening, an inverted yield curve 00:13:39.309 --> 00:13:41.250 happens when short term borrowing becomes more 00:13:41.250 --> 00:13:43.700 expensive than long term government bonds. It's 00:13:43.700 --> 00:13:46.799 a classic flashing red warning sign of an economic 00:13:46.799 --> 00:13:49.059 slowdown. And if you are a dot -com company with 00:13:49.059 --> 00:13:51.799 no revenue, you rely on constant cheap short 00:13:51.799 --> 00:13:53.899 -term borrowing just to make your payroll and 00:13:53.899 --> 00:13:56.639 pay your server bills. Right. An inverted yield 00:13:56.639 --> 00:13:59.039 curve means the cost of rolling over your short 00:13:59.039 --> 00:14:02.179 term debt just skyrocketed. Your financial oxygen 00:14:02.179 --> 00:14:04.940 line is completely clamped. And adding to the 00:14:04.940 --> 00:14:07.799 sheer panic in the tech sector, a federal judge 00:14:07.799 --> 00:14:10.480 rules in early April that Microsoft is guilty 00:14:10.480 --> 00:14:13.659 of monopolization in their landmark antitrust 00:14:13.659 --> 00:14:16.340 case. So the legal foundation of the most successful 00:14:16.340 --> 00:14:19.559 tech company in the world is suddenly under existential 00:14:19.559 --> 00:14:22.710 threat. The market loses its anchor. Right. And 00:14:22.710 --> 00:14:25.110 this cascading timeline brings up a really fierce 00:14:25.110 --> 00:14:28.009 debate in the sources regarding Alan Greenspan's 00:14:28.009 --> 00:14:30.389 legacy. Yeah, let's talk about Greenspan. Some 00:14:30.389 --> 00:14:32.929 economists blame his specific aggressive rate 00:14:32.929 --> 00:14:35.470 hikes in the spring of 2000 for actively puncturing 00:14:35.470 --> 00:14:38.019 the bubble. But others offer a sharper critique, 00:14:38.320 --> 00:14:40.759 like the economist Paul Trugman, who argued that 00:14:40.759 --> 00:14:42.620 Greenspan's failure wasn't popping the bubble. 00:14:43.039 --> 00:14:45.519 It was his refusal to regulate the leverage that 00:14:45.519 --> 00:14:47.659 built it in the first place. Specifically, that 00:14:47.659 --> 00:14:49.740 Greenspan didn't impose margin requirements. 00:14:49.960 --> 00:14:52.740 Exactly. Margin requirements dictate how much 00:14:52.740 --> 00:14:55.840 actual cash an investor must put down when borrowing 00:14:55.840 --> 00:14:58.539 money from a broker to buy stock. In the late 00:14:58.539 --> 00:15:01.399 90s, day traders were highly leveraged, using 00:15:01.399 --> 00:15:04.320 borrowed money to amplify their bets on dot coms. 00:15:04.419 --> 00:15:05.860 Right. And the Federal Reserve had the power 00:15:05.860 --> 00:15:09.639 to step in and say, you must put down 80 % of 00:15:09.639 --> 00:15:12.419 your own cash instead of 50%, which would have 00:15:12.419 --> 00:15:15.000 choked off the speculative leverage safely. But 00:15:15.000 --> 00:15:17.720 he chose not to touch the margin rules. He let 00:15:17.720 --> 00:15:20.299 the leverage run hot. waited until the entire 00:15:20.299 --> 00:15:22.620 structure collapsed under its own weight and 00:15:22.620 --> 00:15:24.720 then attempted to clean up the multi -trillion 00:15:24.720 --> 00:15:26.740 dollar wreckage afterward. And when the dust 00:15:26.740 --> 00:15:30.620 finally settled, five trillion dollars in market 00:15:30.620 --> 00:15:32.419 capitalization had been wiped from the board. 00:15:33.000 --> 00:15:35.860 Five trillion. The buzzwords changed literally 00:15:35.860 --> 00:15:38.659 overnight. Mindshare was out. Burn rate was in. 00:15:38.820 --> 00:15:42.299 Burn rate. The exact terrifying speed at which 00:15:42.299 --> 00:15:44.019 a company was bleeding through its remaining 00:15:44.019 --> 00:15:46.899 capital before it would inevitably declare bankruptcy. 00:15:47.070 --> 00:15:49.470 And the casualties of that burn rate were spectacular. 00:15:49.889 --> 00:15:52.669 You had Webvan, which attempted to build an immense 00:15:52.669 --> 00:15:55.490 nationwide online grocery delivery infrastructure 00:15:55.490 --> 00:15:58.409 a full decade before consumer habits were ready 00:15:58.409 --> 00:16:02.490 for it. Too early. Way too early. Then Boo .com. 00:16:02.750 --> 00:16:05.149 a European fashion retailer that burned through 00:16:05.149 --> 00:16:09.549 $135 million in 18 months trying to force heavy 00:16:09.549 --> 00:16:12.750 interactive graphics onto consumers using slow 00:16:12.750 --> 00:16:15.309 dialogue modems. Also, just horrible timing and 00:16:15.309 --> 00:16:17.549 execution. And of course, Pets .com, the company 00:16:17.549 --> 00:16:19.950 with the Super Bowl ad, went completely out of 00:16:19.950 --> 00:16:22.230 business and liquidated its assets just nine 00:16:22.230 --> 00:16:24.690 months after its IPO. Just nine months. But, 00:16:24.809 --> 00:16:26.669 you know, it wasn't a total extinction event. 00:16:27.029 --> 00:16:29.789 The sources note that 48 % of dot com companies 00:16:29.789 --> 00:16:32.860 actually survived through 2004. have survived. 00:16:32.899 --> 00:16:36.379 Yeah, albeit at drastically lower, humbled valuations. 00:16:36.740 --> 00:16:39.139 Companies like Amazon and eBay ruthlessly manage 00:16:39.139 --> 00:16:41.500 their burn rates, weather the brutal winter, 00:16:41.779 --> 00:16:44.159 and eventually leverage their surviving infrastructure 00:16:44.159 --> 00:16:46.860 to become the titans of the modern web. So they 00:16:46.860 --> 00:16:49.000 made it through. But the cultural fallout from 00:16:49.000 --> 00:16:51.379 the wreckage extended far beyond Wall Street. 00:16:51.759 --> 00:16:54.700 You had a sudden massive glut of software engineers 00:16:54.700 --> 00:16:57.899 and programmers flooding the job market as thousands 00:16:57.899 --> 00:17:00.399 of startups just evaporated. Yeah. University 00:17:00.399 --> 00:17:02.519 enrollment for computer science degrees plummeted 00:17:02.519 --> 00:17:05.019 because the industry suddenly looked wildly unstable 00:17:05.019 --> 00:17:09.220 and toxic. And those high end $1 ,100 Aaron office 00:17:09.220 --> 00:17:12.970 chairs became this dark punchline. They were 00:17:12.970 --> 00:17:16.210 liquidated en masse by the thousands as FANF 00:17:16.210 --> 00:17:18.869 startup offices in San Francisco were repossessed. 00:17:19.170 --> 00:17:21.109 The physical artifacts of the bubble. Exactly. 00:17:21.430 --> 00:17:24.230 And perhaps most damaging retail investor confidence 00:17:24.230 --> 00:17:27.589 was deeply structurally eroded. Not just by the 00:17:27.589 --> 00:17:30.549 tech failures, but by the massive systemic accounting 00:17:30.549 --> 00:17:32.789 frauds that were exposed as the tide went out. 00:17:33.089 --> 00:17:35.829 When the cheap money disappeared, the devastating 00:17:35.829 --> 00:17:37.849 criminal frauds that companies like Enron and 00:17:37.849 --> 00:17:40.130 Worldcom were laid bare for the public to see. 00:17:40.359 --> 00:17:42.900 So what does this all mean for you, the listener, 00:17:43.160 --> 00:17:45.200 navigating today's tech news? Well, if we look 00:17:45.200 --> 00:17:47.619 at the macro perspective, it's incredibly easy 00:17:47.619 --> 00:17:50.759 to dismiss the dot -com bubble as merely a cautionary 00:17:50.759 --> 00:17:53.579 tale of greed, hubris, and foolishness. Sure, 00:17:53.640 --> 00:17:56.099 that's the standard narrative. It is. But the 00:17:56.099 --> 00:17:57.759 venture capitalist Fred Wilson, who actually 00:17:57.759 --> 00:17:59.980 lived through it and lost 90 % of his net worth 00:17:59.980 --> 00:18:02.220 in the crash, offered a profound defense of the 00:18:02.220 --> 00:18:04.849 era in our source material. He quoted a friend 00:18:04.849 --> 00:18:07.210 pointing out that nothing important has ever 00:18:07.210 --> 00:18:09.529 been built without irrational exuberance. Wow, 00:18:09.730 --> 00:18:12.210 that reframes the entire catastrophe. It really 00:18:12.210 --> 00:18:15.089 does. Wilson's point is that human nature requires 00:18:15.089 --> 00:18:18.230 collective mania to finance massive leaps forward, 00:18:18.549 --> 00:18:21.009 to convince rational investors to open their 00:18:21.009 --> 00:18:24.210 wallets and finance absurdly risky, world -changing 00:18:24.210 --> 00:18:26.750 infrastructure. Whether it's the transcontinental 00:18:26.750 --> 00:18:30.410 railroads, or the early aerospace industry, or 00:18:30.410 --> 00:18:33.980 a global network of computers, the intoxicating 00:18:33.980 --> 00:18:37.039 promise of infinite wealth. So it's a necessary 00:18:37.039 --> 00:18:40.140 evil. In a way, yes. Trillions of dollars of 00:18:40.140 --> 00:18:42.740 speculative capital were destroyed. But that 00:18:42.740 --> 00:18:45.099 money didn't just vanish into the ether. It paid 00:18:45.099 --> 00:18:47.559 the salaries of the engineers who wrote the foundational 00:18:47.559 --> 00:18:49.920 code. It paid for the high -throughput databases. 00:18:50.240 --> 00:18:52.819 Exactly. It funded the fleets of trucks that 00:18:52.819 --> 00:18:54.980 lead millions of miles of fiber optic cables 00:18:54.980 --> 00:18:57.619 under our oceans and cities. That underlying 00:18:57.619 --> 00:18:59.640 physical architecture survived the financial 00:18:59.640 --> 00:19:02.279 crash. The telecom companies went bankrupt, but 00:19:02.279 --> 00:19:04.980 the dark fiber remained in the ground. Precisely. 00:19:05.339 --> 00:19:07.559 The speculative mania accidentally subsidized 00:19:07.559 --> 00:19:09.940 the creation of the modern Internet, transforming 00:19:09.940 --> 00:19:12.500 it into the cheap, accessible utility that changed 00:19:12.500 --> 00:19:15.019 all of our lives. The glass penthouses may have 00:19:15.019 --> 00:19:16.940 shattered and the day traders may have lost their 00:19:16.940 --> 00:19:20.500 life savings. But that chaotic, rushed, seemingly 00:19:20.500 --> 00:19:23.660 foolish construction project left behind a foundation 00:19:23.660 --> 00:19:26.779 of incredibly deep, complex plumbing that our 00:19:26.779 --> 00:19:29.640 entire modern society rests on today. It built 00:19:29.640 --> 00:19:31.460 the future, just not the way anyone planned. 00:19:31.740 --> 00:19:34.500 Right. So I will leave you with this final thought 00:19:34.500 --> 00:19:36.980 to ponder as you navigate today's tech news. 00:19:38.000 --> 00:19:40.940 If irrational exuberance and massive financial 00:19:40.940 --> 00:19:44.000 loss were the required societal price to build 00:19:44.000 --> 00:19:46.619 the internet backbone we rely on today, what 00:19:46.619 --> 00:19:49.299 future indispensable infrastructure is being 00:19:49.299 --> 00:19:51.980 quietly accidentally funded by the confusing 00:19:51.980 --> 00:19:54.240 financial hype cycles you are seeing in the news 00:19:54.240 --> 00:19:56.119 right now? That is a great question to end on. 00:19:56.339 --> 00:19:58.200 Thank you for joining us on this deep dive. Keep 00:19:58.200 --> 00:20:00.000 questioning the sources you read and we'll see 00:20:00.000 --> 00:20:00.539 you next time.